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Nash Equilibrium and the Real World

Prof. John Nash, one of the intellectual parents behind game theory died with his wife in a car accident on the night of 23rd May 2015. Tragically, his death occurred after returning from Norway where he received the Abel Prize, the equivalent of the Nobel Prize in mathematics (fun fact: there is no Nobel Prize for mathematics). He also has a Nobel Prize in Economics. It was for his work in game theory that won him this award, specifically in defining what is now called a ‘Nash Equilibrium’.

Game theory existed before John Nash, but the only equivalent equilibrium concept was the MinMax theorem formulated by John von Neumann (another fun fact: apparently he inspired the mad scientist character in the movie Dr Strangelove). Unlike the MinMax concept, the Nash Equilibrium was a broader solution concept that could be applied outside of zero sum games. For me, what inspired me to study game theory was that it could help explain why we live in an imperfect world. Without the Nash Equilibrium, game theory and economics wouldn’t have the power it has today. We would all believe that somehow we can’t do better than competitive markets. Well, game theory and specifically using the Nash Equilibrium concept allows us to look at the choices that face people, firms, politicians and see whether or not we could have done better. In this article, I want to examine some specific cases that we can all observe. But first, what is the Nash Equilibrium?

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Lucky Money and Information Revelation

Happy Lunar New Year! Or if you want to impress your Chinese friends, in Mandarin you could say, xin nian kuai le (新年快乐) Or in Cantonese, gong hei fat choy (恭禧發財). Handy tip: find out what dialect your friend speaks before showing off your cultural expertise (I’m assuming you know they are Chinese). For some of you, you may partake in the celebrations at a family home or in a Chinese restaurant (food is always involved when the Chinese celebrate anything). If so, you may witness the bizarre tradition (to non-Asian people) of older people giving money to the younger generation in red envelopes. You may also witness three generations stuffing their faces with unseemly haste, don’t worry it’s polite in Chinese culture to eat too much and complain afterwards. Some Western people think giving money is a materialistic way of gift-giving since you couldn’t even bother to invest time and effort to get a proper gift. Actually, a lot of thought has gone into it. How much you give reveals private information on what you really think of your younger and unmarried relatives. Here is a useful guide for those of you new to giving ‘Lucky Money’.

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