Nash Equilibrium

The Idea

Contributed by @philhagspiel |  Edited and curated by @philhagspiel

When the outcomes of your choices depend on the interaction with others' choices, there exists an state where no one can improve their outcomes.

Logic & Reasoning
Mental Models

Game Theory is a school of thought stemming from the field of economics that has extreme applicability in real-life situations. Generally, game theory tries to understand, model and predict how actors (individuals, companies, countries, investors, ...) decide and act in circumstances where outcomes are determined on what everyone else is doing around them.

From law-making to foreign policy to business investment strategies to career choices to decisions we make in our relationships — almost all areas of decision making are affected by game theory, whether we're aware of it or not.

A Nash Equilibrium is a particular state where none of the actors involved have an incentive to deviate from their current strategy, taking into account the strategies of those around them.

In other words, in a Nash Equilibrium, people (or entities like companies) will not do anything different because they expect that their situation will get worse because of it (taking into account that others will react to how they change).

Understanding the field of Game Theory in general and the concept of Nash Equilibrium in particular can create a completely new perspective on how dynamics between people in personal and business life, as well as between organizations or even countries develop.

While most actors in the real world aren't aware of these concepts, their strategies of actions are nevertheless described and explained by them to a very large degree.

“Incentives are a superpower.“

— Charlie Munger

Go Deep

  • For a deep dive into the mechanics of the concept of Nash Equilibrium and more ideas around it, check this Wikipedia article.
  • For a first understanding of how game theory applies to real life situations, as well as an intro to the famous Prisoner's Dilemma, read Charles Cazals' article for the London Globalist.
  • Watch Aperture's aesthetic video piece Game Theory: Winning the Game of Life.
  • This Youtube video (12 min.) shows how game theory in general shapes markets and decisions.
  • Watch this scene from A Beautiful Mind (4 min.) for a glimpse into how the idea of a Nash Equilibrium might have come about and how it relates to previous economic wisdom.

Go Beyond

A few further resources you might like if you find above idea interesting: