Nash equilibrium

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Template:Infobox equilibrium In game theory, the Nash equilibrium (named after John Nash, who proposed it) is a kind of optimal collective strategy in a game involving two or more players, where no player has anything to gain by changing only his or her own strategy. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.

The concept of the Nash equilibrium (NE) is not exactly original to Nash (e.g., Antoine Augustin Cournot showed how to find what we now call the Nash equilibrium of the Cournot duopoly game). However, Nash showed for the first time in his dissertation, Non-cooperative games (1950), that Nash equilibria must exist for all finite games with any number of players. Until Nash, this had only been proved for 2-player zero-sum games by John von Neumann and Oskar Morgenstern (1947).

Contents

Formal definition and existence of Nash equilibria

Let (S, f) be a game, where S is the set of strategy profiles and f is the set of payoff profiles. When each player <math>i \in [1,n]</math> chooses strategy <math>x_i \in S_i</math> resulting in strategy profile <math>x</math> <math>= (x_1, ..., x_n)</math> then player <math>i</math> obtains payoff <math>f_i(x)</math>. A strategy profile <math>x* \in S</math> is a Nash equilibrium (NE) if no deviation in strategy by any single player is profitable, that is, if for all <math>i</math>

<math>f_i(x*) \geq f_i(x_i, x*_{-i}).</math>

A game can have a pure strategy NE or a NE in its mixed extension (that of choosing a pure strategy stochastically with a fixed frequency). Nash proved that, if we allow mixed strategies (players choose strategies randomly according to pre-assigned probabilities), then every n-player game in which every player can choose from finitely many strategies admits at least one Nash equilibrium.

Proof sketch

Let <math>\sigma_{-i}</math> be a mixed strategy profile of all players except for player <math>i</math>. We can define a best response correspondence for player <math>i</math>, <math>b_i</math>. <math>b_i</math> is relation from the set of all probability distributions over opponent player profiles to a set of player <math>i</math>'s strategies, such that each element of

<math>b_i(\sigma_{-i})</math>

is a best response to <math>\sigma_{-i}</math>. Define

<math>b(\sigma) = b_1(\sigma_{-1}) \times b_2(\sigma_{-2}) \times \cdots \times b_n(\sigma_{-n})</math>.

One can use the Kakutani fixed point theorem to prove that <math>b</math> has a fixed point. That is, there is a <math>\sigma*</math> such that <math>\sigma* \in b(\sigma*)</math>. Since <math>b(\sigma*)</math> represents the best response for all players to <math>\sigma*</math>, the existence of the fixed point proves that there is some strategy set which is a best response to itself. No player could do any better by deviating, and it is therefore a Nash equilibrium.

Examples

Competition game

Consider the following two-player game: both players simultaneously choose a whole number from 0 to 10. Both players then win the minimum of the two numbers in dollars. In addition, if one player chooses a larger number than the other, then s/he has to pay $2 to the other. This game has a unique Nash equilibrium: both players choosing 0. Any other choice of strategies can be improved if one of the players lowers his number to one less than the other player's number. If the game is modified so that the two players win the named amount if they both choose the same number, and otherwise win nothing, then there are 11 Nash equilibria.

Coordination game

Template:Main

A coordination game
Player 2 adopts strategy 1 Player 2 adopts strategy 2
Player 1 adopts strategy 1 A, A B, C
Player 1 adopts strategy 2 C, B D, D

The coordination game is a classic (symmetric) two player, two strategy game, with the payoff matrix shown to the right, where the payoffs are according to A>C and D>B. The players should thus cooperate on either of the two strategies to receive a high payoff. Players in the game have to agree on one of the two strategies in order to receive a high payoff. If the players do not agree, a lower payoff is rewarded. An example of a coordination game is the setting where two technologies are available to two firms with compatible products, and they have to elect a strategy to become the market standard. If both firms agree on the chosen technology, high sales are expected for both firms. If the firms do not agree on the standard technology, few sales result. Both strategies are Nash equilibria of the game.

Driving on a road, and having to choose either to drive on the left or to drive on the right of the road, is also a coordination game. For example, with payoffs 100 meaning no crash and 0 meaning a crash, the coordination game can be defined with the following payoff matrix:

The driving game
Drive on the Left Drive on the Right
Drive on the Left 100, 100 0, 0
Drive on the Right 0, 0 100, 100

In this case there are two pure strategy Nash equilibria, when both choose to either drive on the left or on the right. If we admit mixed strategies (where a pure strategy is chosen at random, subject to some fixed probability), then there are three Nash equilibria for the same case: two we have seen from the pure-strategy form, where the probabilities are (0%,100%) for player one, (0%, 100%) for player two; and (100%, 0%) for player one, (100%, 0%) for player two respectively. We add another where the probabilities for each player is (50%, 50%).

Prisoner's dilemma

Template:Main (but watch out for differences in the orientation of the payoff matrix) The Prisoner's dilemma has the same payoff matrix as depicted for the Coordination game, but now C > A > D > B. Because C > A and D > B, each player improves his situation by switching from strategy #1 to strategy #2, no matter what the other player decides. The Prisoner's dilemma thus has a single Nash equilibrium: both players choosing strategy #2 ("betraying"). What has long made this an interesting case to study is the fact that 2D < 2A ("both betray" is globally inferior to "both remain loyal"). The globally optimal strategy is unstable; it is not an equilibrium.

As Ian Stewart put it, "sometimes rational decisions aren't sensible!"

Nash equilibria in a payoff matrix

There is an easy numerical way to identify Nash Equilibria on a Payoff Matrix. It is especially helpful in two person games where players have more than two strategies. In this case formal analysis may become too long. This rule does not apply to the case where mixed (stochastic) strategies are of interest. The rule goes as follows: if the first payoff number, in the duplet of the cell, is the maximum of the column of the cell and if the second number is the maximum of the row of the cell - then the cell represents a Nash equlibrium.

We can apply this rule to a 3x3 matrix:

A Payoff Matrix
Option A Option B Option C
Option A 0, 0 25, 40 5, 10
Option B 40, 25 0, 0 5, 15
Option C 10, 5 15, 5 10, 10

Using the rule, we can very quickly (much faster than with formal analysis) see that the Nash Equlibria cells are (B,A) and (A,B). Indeed, for cell (B,A) 40 is the maximum of the first column and 25 is the maximum of the second row. For (A,B) 25 is the maximum of the second column and 40 is the maximum of the first row. Same for cell (C,C). For other cells, either one or both of the duplet members are not the maximum of the corresponding rows and columns.

This said, the actual mechanics of finding equilibrium cells is obvious: find the maximum of a column and check if the second member of the tuple has maximum of the row. If yes - you've got a Nash Equilibrium. Check all columns this way to find all NE cells. As you can easily guess, an NxN matrix may have 0 to N pure strategy Nash equilibria.

Stability

The concept of stability, useful in the analysis of many kinds of equilibrium, can also be applied to Nash equilibria.

A Nash equilibrium for a mixed strategy game is stable if a small change (specifically, an infinitesimal change) in probabilities for one player leads to a situation where two conditions hold:

  1. the player who did not change has no better strategy in the new circumstance
  2. the player who did change is now playing with a strictly worse strategy

If these cases are both met, then a player with the small change in his mixed-strategy will return immediately to the Nash equilibrium. The equilibrium is said to be stable. If condition one does not hold then the equilibrium is unstable. If only condition one holds then there are likely to be an infinite number of optimal strategies for the player who changed. John Nash showed that the latter situation could not arise in a range of well-defined games.

In the Coordination game example above there are both stable and unstable equilibria. The equilibria involving mixed-strategies with 100% probabilities are stable. If either player changes his probabilities slightly, they will be both at a disadvantage, and his opponent will have no reason to change his strategy in turn. The (50%,50%) equilibrium is instability. If either player changes his probabilities, then the other player immediately has a better strategy at either (0%, 100%) or (100%, 0%).

Stability is crucial in practical applications of Nash equilibria, since the mixed-strategy of each player is not perfectly known, but has to be inferred from statistical distribution of his actions in the game. In this case unstable equilibria are very unlikely to arise in practice, since any minute change in the proportions of each strategy seen will lead to a change in strategy and the breakdown of the equilibrium.

Note that stability of the equilibrium is connected to, but not the same thing as, the stability of a strategy.

Occurrence

If a game has a unique Nash equilibrium and is played among players with certain characteristics, then it is true (by definition of these characteristics) that the NE strategy set will be adopted. The necessary and sufficient conditions to be met by the players are:

  1. Each player believes all other participants are rational.
  2. The game correctly describes the utility payoff of all players.
  3. The players are flawless in execution.
  4. The players have sufficient intelligence to deduce the solution.
  5. Each player is rational.

The reasoning behind this realization of the NE is that the first four conditions make playing the NE strategy optimal for each player, and that since the fifth condition identifies each player as an optimizing agent each will take the personally optimizing strategy.

Where the conditions are not met

Examples of game theory problems in which these conditions are not met:

  1. In “Chicken” or an arms race a major consideration is the possibility that the opponent is irrational. This criterion may not be met even where the fifth criterion actually is true (so that players wrongly distrusting each others rationality adopt counter-strategies to expected irrational play on their opponents’ behalf).
  2. The prisoner’s dilemma is not a dilemma if either player is happy to be jailed indefinitely.
  3. Pong has a NE which can be played perfectly by a computer, but to make human vs. computer games interesting the programmers add small errors in execution.
  4. If playing tic-tac-toe with a small child who desperately wants to win (meeting the other criteria) the NE strategy is often not optimal because your young opponent will not themselves adopt an optimal strategy. When playing Chinese chess most people are uncertain of the NE strategy since they haven’t the deductive ability to produce it.Template:Ref
  5. Even if every player believes that all the others are rational one of them may subvert this assumption and opt for an irrational (and possibly self-destructive) strategy. This occasionally happens in top-level poker, when an expert player surprisingly goes "on tilt".

Where the conditions are met

Due to the limited conditions in which NE can actually be observed, they are rarely treated as a guide to day-to-day behaviour, or observed in practice in human negotiations. However, as a theoretical concept in economics, and evolutionary biology the NE has great explanatory power: In these cases the conditions are generally met, for the following reasons:

  1. In these long-run cases the ‘average’ agent can be assumed to act ‘as if’ they were rational, because agents who don’t are competed out of the market or environment (in standard theory). This conclusion is drawn from the “stability” theory above.
  2. The payoff in economics is money, and in evolutionary biology gene transmission, both are the fundamental bottom line of survival (agents ignoring these will not appear in the long run).
  3. The assumption of rationality among all participants is based on the long-run time scale arguments.
  4. ‘The market’ or ‘evolution’ are ascribed the ability to test all strategies.
  5. As point one, an irrational agent is presumed to disappear.

In these situations the assumption that the strategy observed is actually a NE has often been born out of research.

See also

References

  • Fudenberg, Drew and Jean Tirole (1991) Game Theory MIT Press.
  • Mehlmann, A. The Game's Afoot! Game Theory in Myth and Paradox, American Mathematical Society (2000).
  • Morgenstern, Oskar and John von Neumann (1947) The Theory of Games and Economic Behavior Princeton University Press
  • Nash, John (1950) "Equilibrium points in n-person games" Proceedings of the National Academy of the USA 36(1):48-49.

Notes

Template:Note Nash has proven that a perfect NE exists for this type of finite extensive form game – it can be represented as a strategy complying with his original conditions for a game with a NE. Such games may not have unique NE, but at least one of the many equilibrium strategies would be played by players having perfect knowledge of all 10150 game trees.

Topics in game theory
Definitions Normal form game - Extensive form game - Cooperative game - Information set - Strategy - Mixed strategy - Preference
Equilibrium concepts Relations between equilibrium concepts - Dominant strategy equilibrium - Nash equilibrium - Subgame-perfect Nash equilibrium - Bayes-Nash equilibrium - Perfect Bayes-Nash equilibrium - Sequential equilibrium - Equilibrium refinements - Evolutionarily stable strategy
Classes of games Symmetric game - Perfect information - Dynamic game - Repeated game - Signaling game - Cheap talk - Zero-sum game - Mechanism design - Win-win game
Games Prisoner's dilemma - Chicken - Stag hunt - Ultimatum game - Matching pennies - Minority Game - Rock, Paper, Scissors - Dictator game -...
Theorems Revelation principle - Minimax theorem - Purification theorems - Folk theorem of repeated games - Bishop-Cannings theorem
Related topics Mathematics - Economics - Behavioral economics - Evolutionary biology - Evolutionary game theory - Population genetics - Behavioral ecology - List of game theorists
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