John Nash’s indelible contribution to economic analysis
John F. Nash, one of the most influential mathematicians of the 20e century and subject of the 2001 film, “A Beautiful Mind,” died last weekend with his wife, Alicia, in a taxi crash in New Jersey while returning from Oslo to receive the Abel Prize in mathematics, one of the most prestigious honors in the field.
While groundbreaking academic work on the Nobel Laureate’s game theory has influenced many fields, including politics (electoral and legislative rules), sports (football kicks, football run / pass balance) and international relations (nuclear deterrence), they left an indelible mark. in the field of economics, completely changing the way economists think about how individuals and economic agents behave by considering how they react to the behavior and incentives of other individuals.
The Nash Equilbrium and the 28-page doctorate of Nobel Laureate John F. Nash. thesis
Nash’s short 28-page doctorate. The “Non-Cooperative Games” thesis, published in 1951, redefined the definition of “balance” as a state where each player pursues an optimal strategy taking into account the strategies of all other players. He further proved that every finite game had at least one mixed strategy Nash equilibrium (brilliantly using a mathematical statement known as the fixed point theorem).
Simply put, a “mixed strategy” is a strategy in which, instead of choosing a single action known as a “pure strategy”, a player or individual chooses a set of different actions with a certain probability for each. .
In 2001’s “A Beautiful Mind,” Russell Crowe, playing Dr. Nash, explained Nash’s balance using an analogy of how a group of men should optimally approach a group of women while avoiding competition for. the most beautiful rather than pursuing it. together and ultimately lose. The film actually blurs Nash’s brilliant insight. The argument expressed by Russell Crowe implies that individuals can ignore the poor balance result of the game. Nash’s idea was that the bad balance is “uncooperative” (where they are all competing for the most beautiful woman and lose) is the probable outcome (a type of “Prisoner’s Dilemma” example that demonstrates that not all Nash equilibria are an optimal outcome).
Nash Equilibria as Revolutionary Models of Imperfect Competition in Markets
This phenomenon of individuals anticipating the possible actions of others is very important to economists concerned with describing individual economic behavior. Previously, the business world did not necessarily assume that economic agents viewed the incentives of other individuals, but rather viewed theirs as rational agents acting as “price takers” in a perfectly competitive market.
This original line of economic reasoning, which began with Adam Smith’s concept of “the invisible hand,” was part of what economists call the first welfare theorem, that a free competitive market (called by the economists a competitive or Walrasian equilibrium) will always lead to an economically optimal result (assuming that the markets are perfectly competitive, that the transaction costs are negligible and that the actors of the market have perfect information).
When Nash and his contemporary game theorists like John von Neumann arrived in the mid-1920se century, they asked what would happen if they relaxed the assumption that markets were perfectly competitive and if monopolies and oligopolies existed in the model? Nash was not the first to ask this question. French mathematician Antoine Augustin Cournot examined duopolies in 1838 and was many years ahead of his time (his work was first discredited in France and it was not until 30 years later that another economist, Alfred Marshall, redrawn the supply and demand curves).
However, Nash was among the first to come up with a formal and comprehensive mathematical model describing such theoretical behavior of games, going beyond simple oligopoly and monopoly behavior.
Nash’s sparkle: borrowing from the mathematical domain of topology
For Nash to ultimately prove the existence of a “Nash equilibrium” in every finite situation (a very bold claim), it also required several previous breakthroughs in mathematics, especially in the seemingly unrelated realm of topology.
The Kakutani Fixed Point Theorem was developed by Japanese-born mathematician Shizuo Kakutani in 1941 and was used in John Nash’s doctorate. thesis to prove what has finally been called “Nash equilibrium”. Kakutani’s topological theorem showed the existence of “fixed points” for what are called “set-valued functions”, extending the work of Brouwer’s fixed point theorem which proved the existence of “fixed points. »For continuous functions.
Nash’s ingenuity was to define any scenario (such as competition between monopolies or economic interaction between individuals) as a “defined-value function” with a discrete number of choices for each individual. According to Nash’s logic, Kakutani’s topological theorem then proved that any game or finite scenario must have at least one “fixed point”, or equilibrium.
This methodology was used again to mathematically formalize the first well-being theorem in competitive markets in what is today called the Arrow-Debreu model, first published in the groundbreaking 1954 article, entitled “Existence of an Equilibrium for a Competitive Economy”, which served as much as an analytical confirmation of the hypothesis of the “invisible hand” of Adam Smith under conditions of perfect competition (no monopolies or oligopolies ).
The prisoner’s dilemma: an example of why a Nash equilibrium is not necessarily an optimal economic outcome
The development of the Nash equilibrium fundamentally changed economics. This methodology describes equilibria where a free market has not necessarily led to an economically optimal outcome (unless there is perfect competition).
The classic example is the Prisoner’s Dilemma, a game formalized by Nash’s thesis supervisor Albert Tucker, a scenario where two accomplices in a crime are arrested and offer a deal to each prisoner or if they confess and testify against their accomplice, they ‘He will be released where the other will be sentenced to a full sentence (say 10 years) in prison. If both prisoners remain silent, prosecutors cannot prove the most serious charges and both will serve reduced sentences (say just a year behind bars for less serious crimes). If both confess, prosecutors wouldn’t need their testimony and both would get the full sentence.
The two prisoners each have two choices, either betray their partner by confessing to the crime, or remain silent. If one prisoner confesses, while the other is released, he receives a reduced sentence, while if it is both, he is better off.
However, when calculating their optimal contingent strategies using theoretical game analysis, the two betraying suspects are Nash’s equilibrium (the likely outcome), although the best overall outcome is that both remain. quiet.
This is a small, simplified example of a type of game often seen elsewhere in economic analysis, including Greece’s decision to leave the euro, antitrust issues, public free-riding (also known as common goods tragedy) and environmental problems (all countries would theoretically benefit from a more stable climate, but a single country is often reluctant to reduce CO2 emissions).
Nash’s beautiful spirit will continue to influence and inspire
Nash’s style and method of problem analysis will undoubtedly continue to influence not only economics, but so many other areas he touched, including mathematics, politics, sports, and international relations. . The human influence of John Nash and his wife, Alicia, who became advocates for mental health later in life as a result of his struggles with schizophrenia, documented in the 2001 film, “A Beautiful Mind” , will undoubtedly continue to inspire many as well.