Definition
Per Liberto (2021) the Nash Equilibrium is a component of game theory. It asserts that no player will deviate from such option/strategy. It is a stable and sustainable outcome.
Why It Matters
In a Nash Equilibrium each player’s strategy is optimal when considering the strategies of competitors. (Chen) (It does not assert that it is the dominant strategy).
Example
Imagine Liam and Zoe can independently choose strategy A where they take $1, or strategy B where they lose $1. Obviously, both players will choose strategy A and win $1.
If you revealed both strategies to Liam and Zoe, they will likely maintain their strategies and “neither has an option to change to a strategy that would benefit them more.” (Chen) Therefore, this is a Nash Equilibrium.
Limitations
Nash Equilibrium assumes player’s are completely rational, however reality isn’t black and white, it’s grey - our decisions are formed by cognitive biases, emotions and context.
Origins
It was devised by 1994 Nobel Prize for Economics winner John Nash.
Work cited:
Liberto, Daniel. “Cournot Competition.” Investopedia, 31 Oct. 2021, www.investopedia.com/terms/c/cournot-competition.asp.
Chen, James. “Nash Equilibrium: How It Works in Game Theory, Examples, plus Prisoner’s Dilemma.” Investopedia, 5 June 2024, www.investopedia.com/terms/n/nash-equilibrium.asp.
