Nash Equilibrium
Nash equilibrium, named after mathematician John Nash, is a concept in game
theory that describes a situation where no player can unilaterally change their
strategy to improve their outcome given the strategies of the other players. In
essence, it's a stable state where everyone is playing their best response to the
other players' strategies.
Key Characteristics of Nash Equilibrium
● Stability: No player has an incentive to deviate from their current
strategy.
● Mutual Best Response: Each player's strategy is the best response to the
other players' strategies.
● No Regrets: Players cannot look back and wish they had chosen a
different strategy.
Types of Nash Equilibria
1. Pure Strategy Nash Equilibrium: In this case, each player chooses a
specific strategy with certainty.
2. Mixed Strategy Nash Equilibrium: In this case, players randomize their
choices between different strategies.
Finding Nash Equilibria
To find Nash equilibria in a game, we can use several methods:
● Dominant Strategy: If a player has a strategy that is always better than
their other options, regardless of what the other players do, it's called a
dominant strategy. A game with dominant strategies for all players will
have a unique pure strategy Nash equilibrium.
● Iterated Elimination of Dominated Strategies: This method involves
repeatedly eliminating strategies that are dominated by other strategies.
The remaining strategies will form a Nash equilibrium.
● Best Response Analysis: This method involves finding the best response
for each player given the other players' strategies. The intersection of
these best responses will be a Nash equilibrium.
Examples of Nash Equilibrium
● The Prisoner's Dilemma: A classic example where two prisoners must
decide whether to confess or remain silent. The Nash equilibrium is for
both prisoners to confess, even though they would be better off if they
both remained silent.
Nash Equilibrium: A New Scenario with Bala and Anil
Scenario:
Bala and Anil are farmers who live in the same village. They can choose to
cultivate cassava or rice. The yield for each crop depends on the choices of both
farmers. If both cultivate cassava, the market will be flooded, and the price will
be low. If both cultivate rice, the same problem will occur. However, if one
cultivates cassava and the other cultivates rice, they can benefit from
complementary crops.
Payoff Matrix:
Bala/ Cassa Ric
Anil va e
(2,
Cassava (1, 1)
3)
(0,
Rice (3, 2)
0)
Export to Sheets
● The first number in each pair represents Bala's payoff.
● The second number represents Anil's payoff.
Analyzing the Payoff Matrix:
● If Bala cultivates cassava and Anil cultivates rice, Bala gets a higher
payoff (2) than if he had cultivated rice (1). Similarly, Anil gets a higher
payoff (3) than if he had cultivated cassava.
● If both cultivate the same crop, they both get a lower payoff (1) than if
they had cultivated different crops.
Nash Equilibrium:
In this case, there are two pure strategy Nash equilibria:
1. Both cultivate cassava.
2. Both cultivate rice.
● If both are cultivating cassava, neither has an incentive to switch to rice.
● If both are cultivating rice, neither has an incentive to switch to cassava.
However, both of these equilibria are Pareto inefficient. This means that there
is another outcome (both cultivating different crops) that would make both
farmers better off.
Conclusion:
This example illustrates a situation where there are multiple Nash equilibria, but
not all of them are equally desirable. In some cases, coordination or cooperation
between the players can lead to a more efficient outcome.
Limitations of Nash Equilibrium
● Multiple Equilibria: A game can have multiple Nash equilibria, making
it difficult to predict the outcome.
● Inefficiency: Nash equilibria can be inefficient, meaning that there might
be other outcomes that would make all players better off.
● Coordination Problems: In games with multiple equilibria, players may
need to coordinate their choices to reach a desirable outcome.
Applications of Nash Equilibrium
Nash equilibrium is a fundamental concept in game theory with applications in
various fields, including economics, political science, biology, and computer
science. It helps us understand the behavior of individuals and groups in
strategic situations and can be used to design policies and strategies.
In conclusion, Nash equilibrium provides a valuable framework for analyzing
strategic interactions. By understanding the concept and its implications, we can
gain insights into the dynamics of decision-making and the potential outcomes
of various situations.
