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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?