Nash equilibrium is a foundational concept in game theory describing a situation in which, in a game involving two or more players, no participant can improve their own outcome by changing their strategy as long as all other players keep theirs unchanged. In other words, each player’s strategy is optimal in light of the strategies chosen by others. This leads to a stable outcome where no individual has an incentive to deviate.
Related Theorist: John Nash
The concept was developed by American mathematician John Nash, who proved that every finite game has at least one Nash equilibrium (possibly involving mixed or randomized strategies). He was awarded the Nobel Prize in Economics in 1994 for this work.
Significance:
Nash equilibrium is widely used to analyze competitive and cooperative interactions in economics, business, and other fields. It provides a way to predict the decisions of players in scenarios where their choices are interdependent, such as pricing strategies between firms, negotiations, or even military standoffs. The well-known “prisoner’s dilemma” is a classic example, illustrating how rational decision-making can sometimes lead to outcomes that are not optimal for all players involved.
Key Takeaway:
In Nash equilibrium, every player’s choice is the best they can do, considering what others are doing—making it a powerful tool for analyzing strategy and competition in complex environments
