How Nash Equilibrium Changed Economics

by Jörgen Eriksson on June 2, 2015

Game Theory

John Forbes Nash, a mathematical genius,  died together with his wife Alicia in a car accident last week, while taking a taxi back home from an award ceremony. Nash was 86 years old and lived a long life of both success and hardship, as can be read in this well-written obituary by The Economist. It may also be interesting this read this blog post from The Bearing Wave two years ago.

Screenshot 2015-05-31 09.59.37Nash was one of the most influential economists of the 20th Century, and is hailed with firmly anchoring game theory at the heart of economics and he won the Nobel Prize in Economics to the Memory of Alfred Nobel in 1994. As Nash was handed the price, Professor Karl-Göran Mäler said in the presentation speech:

A simple economic example of strategic interaction is where two firms are competing with identical products on the same market. If one firm increases its production, this will make the market price fall and therefore reduce profits for the other firm. The other firm will obviously try to counteract this, for example by increasing its production and so maintaining its market share but at the cost of further reduction in market price. The first company must therefore anticipate this countermove and possible further countermoves when it makes its decision to increase production. Can we predict how the parties will choose their strategies in situations like this?

To this question, Nash had mathematically found the solution. It came to be called Nash Equilibrium, and it has become a fundamental concept in the theory of strategy, and the most widely used method of predicting the outcome of a strategic interaction, such as competition between companies, political conflict and competitive interaction between individuals.

In the video below from Financial Times, Ferdinando Giugliano explains why Nash work is so important and how the Nash equilibrium theory works in a simplified, intuitive example.The real world applications are, of course, far more complex.

How Nash Equilibrium Changed Economics

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail, connect on LinkedIn onörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

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