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The Nash Equilibrium and Why It Matters

https://www.economist.com/blogs/economist-explains/2016/09/economist-explains-economics?fsrc=scn/li/te/bl/ed/theeconomistexplainseconomicswhatisthenashequilibriumandwhydoesitmatter

In this article, the author begins by claiming how the Nash Equilibrium is one of the most important tools needed to understand the past and predict the future. The author gives many examples of the Nash equilibrium is extremely useful including how it helps economists work out how competing companies set their prices, how governments should design auctions to squeeze the most from bidders and how to explain the sometimes self-defeating decisions that groups make. The author then proceeds to discuss one of the most famous examples of Nash Equilibrium, the prisoner’s dilemma. The author explains how the prisoner’s dilemma is when two prisoners, let’s say A and B, are put in two separate cells and are given the options to confess or not confess with varying consequences. The consequences are if A and B both confess to the crime, they each serve two years in jail. If A denies the crime but B confessesB gets away scot-free while A has to serve 3 years in prison and vice versa. If A and B both deny the crime, they each serve one year in jail. The author claims how in this situation, even though collectively it would make sense for both of them to not confess, the stable outcome in this situation is both of the prisoners confessing.

The author then explains this is the case because in a Nash equilibrium every person in a group will only make the best decision for themselves. Also, this decision is based on what this person thinks the other will do. The author explains that in the prisoner’s dilemma, keeping quiet and not confessing would never make sense. If the other person confesses, then the prisoner would have to go to jail for keeping quiet. If the other person does confess, then confessing would allow the prisoner to get away without any repercussions. Therefore, the prisoner will confess either way because he/she will act according to their own self-interests.  The author explains how this applies to real companies because will use nash equilibrium to determine how to respond to competitors’ prices and strategies. The author concludes by explaining how the Nash equilibrium explains a lot of the problems in the world like global warming and overfishing because event though collectively, the world would be better off if we did not pollute as much or overfish as much, each person is looking out for their own self-interest.

 

 

This article is closely related to what we are discussing in class because Nash Equilibrium was a huge part of our classroom discussions and material and this article really highlights some of the reasons why Nash equilibrium is so important and how it works and how it is present in the real world. However, I think one thing this article did not cover that we discussed in class was the idea of having multiple equilibria and having mixed equilibrium. I understand the author was limited in what he could say and could not cover everything, but I think it would have been interesting if he covered his perspective on having mixed equilibrium and how that is present in the current world, especially cause that was such a big part of our class discussion. Another part of the article that connects to what we discuss in class is the real world example of the Nash equilibrium. In class, we draw parallels to how the concepts we discuss are represented int he real world, and the author does as well with Nash Equilibrium by explaining and drawing connections between Nash Equilibrium and global warming and overfishing.

 

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