Nash Equilibrium
| Nash Equilibrium | |
|---|---|
| A solution concept in game theory | |
| Relationship | |
| Subset of | Rationalizability, Epsilon-equilibrium, Correlated equilibrium |
| Superset of | Evolutionarily stable strategy, Subgame perfect equilibrium, Perfect Bayesian equilibrium, Trembling hand perfect equilibrium, Stable Nash equilibrium, Strong Nash equilibrium |
| Significance | |
| Proposed by | John Forbes Nash Jr. |
| Used for | All non-cooperative games |
In game theory, the Nash equilibrium is a solution concept of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his or her own strategy. If each player has chosen a strategy and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitutes a Nash equilibrium. The Nash equilibrium is one of the foundational concepts in game theory. The reality of the Nash equilibrium of a game can be tested using experimental economics methods.
Stated simply, Amy and Phil are in Nash equilibrium if Amy is making the best decision she can, taking into account Phil's decision while Phil's decision remains unchanged, and Phil is making the best decision he can, taking into account Amy's decision while Amy's decision remains unchanged. Likewise, a group of players are in Nash equilibrium if each one is making the best decision possible, taking into account the decisions of the others in the game as long as the other party's decision remains unchanged.
Game theorists use the Nash equilibrium concept to analyze the outcome of the strategic interaction of several decision makers. In other words, it provides a way of predicting what will happen if several people or several institutions are making decisions at the same time, and if the outcome depends on the decisions of the others. The simple insight underlying John Nash's idea is that one cannot predict the result of the choices of multiple decision makers if one analyzes those decisions in isolation. Instead, one must ask what each player would do, taking into account the decision-making of the others.
Nash equilibrium has been used to analyze hostile situations like war and arms races (see prisoner's dilemma), and also how conflict may be mitigated by repeated interaction (see tit-for-tat). It has also been used to study to what extent people with different preferences can cooperate (see battle of the sexes), and whether they will take risks to achieve a cooperative outcome (see stag hunt). It has been used to study the adoption of technical standards, and also the occurrence of bank runs and currency crises (see coordination game). Other applications include traffic flow (see Wardrop's principle), how to organize auctions (see auction theory), the outcome of efforts exerted by multiple parties in the education process, regulatory legislation such as environmental regulations (see tragedy of the Commons), analysing strategies in marketing and even penalty kicks in football (see matching pennies).
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