Fatih Kansoy
Background: Adam Smith, John Nash, and Hollywood
Concept: What is Nash Equilibrium, and Why it matters?
Questions & Answers
Adam Smith vs John Nash
Nash’s eureka movement: “Adam Smith needs revision.”
AS: “In competition, individual ambition serves the common good."
JN: Adam Smith is wrong because:
“the best result would come from everyone in the group doing what is best for himself and the group."
At this point, Nash rushes out of the bar and spends the next few months writing his treatise on general equilibrium theory.
Although we do not know how Nash’s friend acted but the Hollywood simply wrong on Nash equilibrium
What is Nash Equilibrium?
Some definitions and assumptions:
We assume that all economic agents (players) have complete information and all actions are taken simultaneously.
Equilibrium: ... everyone is doing the best s/he can given what everyone else is doing
Players: Each decision-maker in a game os called a player
Strategies: Each course of action open to a player during the game is called a strategy
Payoffs: The final return to each player at the conclusion of a game is called a payoff.
What is Nash Equilibrium?
In a Nash equilibrium, every player in a group makes the best decision for /himself/herself, based on what s/he thinks the others will do.
And no one can do better by changing strategy: every member of the group is doing as well as they possibly can.
This does not mean the optimal outcome for society.
Nash showed that every “game” with a finite number of players, each with a finite number of options to choose from, would have at least one such equilibrium.
Prisoner's Dilemma
Prisoner's Dilemma
Nash Equilibrium:
the only stable outcome is for both to confess.
Wise of Crowd vs Crowd Trouble
Summary and Why Hollywood is Wrong
Nash equilibrium, no one is able to improve their own situation by changing strategy.