The Nash Equilibrium

John Nash was a 19-year-old mathematical genius who enrolled at Princeton with just one undergraduate economics degree. During his first 14 months of research, he developed a principle known as the Nash equilibrium, which won him a Nobel Prize in economics for his contribution to game theory. The Nash equilibrium depicts a stable outcome as a result of organisations or individuals making coherent choices based on what people believe to be rational. This principle demonstrates that no man is capable of improving his situation by using a different strategy (Hanson par.2). Nash used the example of the dilemma of two prisoners in two different cells who were offered a similar deal by the district attorney. If they agreed to admit to a bloody homicide, they would each get a ten-year jail term. If either keeps quiet and the other admits, then the snitch would be rewarded, and the other would face a lifetime of imprisonment. If both of them remained quiet, they would face minor charges and only one year in jail (Hanson par.7-9).

The author of this article agrees with John Nash_x0092_s concept that _x0093_every _x0091_game_x0092_ with a finite number of players, each with a determinate number of alternatives to choose from, would have at least one equilibrium (Hanson par.6). For instance, in the example of the prisoners_x0092_ dilemma, Nash_x0092_s equilibrium solution would be that both of them could confess. Both confessions would be the best response to the other_x0092_s tactics since one might snitch to avoid a lifetime in jail. Nash_x0092_s insights had significant impacts on economics. He explains that the knowledge that an individual or one firm_x0092_s decision might result in a healthy economy or a failure, and what may seem best for an individual may be disastrous for the whole group (Hanson par.25). The author gives an example of employees who are competing to impress their boss by staying the longest hours in the office and end up encouraging workforce exhaustion.

In relation to microeconomics, Nash_x0092_s equilibrium fits perfectly. In real life situations, firms are interdependent. The decision a business takes will directly or indirectly affect the profits of the other businesses in the same region. This concept is comparable to that of the prisoner_x0092_s dilemma, where the fate of one prisoner depends on the decision of the other (Krugman and Wells 426). Therefore, when a firm decides to cut the price of a specified unit to get it sold faster, this decision affects other firms with the same unit; thus, other businesses will suffer losses (Krugman and Wells 425-27). Consequently, firms should work at equilibrium to stay afloat in their business.

Conclusion

Conclusively, I am in agreement with the author. The author looks at the market from a different perspective. Unlike the firm owners whose main objective is to make a profit, the author_x0092_s objective is to see the balanced economy. Guided by Nash_x0092_s equilibrium, the author prevents firm owners from making selfish decisions that might cost the whole market. He gives an example of a free sailing fisherman who may rush and fish much product which may not be needed, depleting the stock. It would be wise to consider other companies when making decisions in one_x0092_s own company.

Works Cited

Hanson, Robert S. _x0093_Game Theory: Prison Breakthrough._x0094_ The Economist. Web. Aug 20th 2016.

http://www.economist.com/news/economics-brief/21705308-fifth-our-series-seminal-economic-ideas-looks-nash-equilibrium-prison Accessed May 7th, 2017.

Krugman, Paul and Wells, Robin. Microeconomics. Palgrave Macmillan, 2012. Print.