Decision & Game Theory

Chapter 8
Nash Equilibrium

Sonia R EBAI
Tunis Business Sc hool
University of Tunis
ü Game theory became a field since the book of John von Neumann (a
computer scientist and mathematician and theoretical physicist) and
Oskar Morgenstern (a professor of economics at Princeton University)
published in 1944.

O. Morgenstern

J. von Neumann
ü The founders of game theory argued that all social problems can be

formulated as a simple mathematical model of game by specifying the

players, the strategies and the payoffs.

ü They posed the question about finding a unified principle or governing

principle which can be applied to all social.

ü Specifically they ask the following question “Is there any single solution

concept which can be applied to all social interactions?” that remains an

open question.
ü Six years later the answer to this open
question was discovered by a
mathematical genius, John Nash.

ü He received his Ph.D. from Princeton

University with a 28-page thesis on his
22nd birthday.

ü He invented the notion of Nash

equilibrium.
John Nash(1928-2015)
ü He had a problem of schizophrenia, and he
couldn't continue his research.

ü Sooner It was discovered that his unified

principle was very useful in addressing lots of
economics questions.

ü In 1994 he received Nobel Prize in economics.

ü His life was so interesting that it was made into a

movie called A Beautiful Mind.
ü Nash found the answer in a cup of coffee.

ü Nash get the ingenious idea of considering

the surface of a coffee as the set of all

possible human behavior in a social

problem.

ü If you stir the surface of a coffee, you get a The vortex

vortex, a point that doesn't move.

 ü A point in this picture represents
best replies original behavior of people in a
social situation.
ü The destination represents
another social situation where

All players players are moving towards best

Original behavior of are doing
players replies.
their best
against ü At the vortex point, all players are
others
doing their best against the others
ü This is called Nash equilibrium
Nash Equilibrium
ü A Nash equilibrium is a set of strategies, one for each player, that are each
best responses against one another.

ü In a two-player game, a Nash equilibrium is a pair of strategies (a*,b*)

such that a* is an optimal strategy for player A against b* and b* is an
optimal strategy for player B against a*.

ü A Nash equilibrium is where the strategy of one player is the best strategy

when other players play their best strategy.

ü A Nash equilibrium is a situation where no player has an interest in
deviating (alone) from the obtained situation.

ü Not all games have a Nash equilibrium in pure strategies. They may
have Nash equilibrium in mixed strategies.

ü Nash proved the existence of a ash equilibrium in all finite games.

ü The existence theorem does not guarantee the existence of a pure-

strategy Nash equilibrium.
ü It does guarantee that, if a pure-strategy Nash equilibrium does not exist, a
mixed-strategy Nash equilibrium does.

ü Every game has a Nash equilibrium, and some games may have several
Nash equilibria.

ü A drawback to Nash equilibrium is unclear how a player can choose a best

response strategy before knowing how rivals will play

ü A quick way to find the Nash equilibrium is to underline the best-response

payoffs. The Nash equilibria correspond to the boxes in which every player’s
payoff is highlighted.
Example

tell if the following games have a pure Nash equilibrium

ü The Battle-of-the-Sexes game

ü The children’s hand game

ü The Prisoner’s Dilemma

 Husband
O F
O (4,2) (1,1)
Wife
F (0,0) (2,4)

Two Nash equilibria (O,O) and (F,F).

 Player R
R S P
R (D,D) (W,L) (L,W)
Player F
S (L,W) (D,D) (W,L)
P (W,L) (L,W) (D,D)

The children’s hand game has no pure Nash equilibrium

 C D

C -1, -1 -15, 0

D 0, -15 -10, -10

D is always best, irrespective of the opponent’s strategy

Rational players play Nash equilibrium (D,D)

ü A strategy that is a best reponse to any strategy the other players might
choose is called a dominant strategy.

ü Defect is a dominant strategy for both players in the prisoner dilemma

game.

ü When a dominant strategy exists, it is the unique Nash equilibrium.

ü There is no dominant strategy in the battle of the sexes game.

Does the following games have Nash equilibrium?

Player 2 Player 2
A B A B C
1 (3,7) (0,0) 1 (3,0) (0,2) (0,3)
Player

2 (4,1) (5,3) Player 1 2 (2,0) (1,1) (2,0)

1

3 (6,5) (4,7) 3 (0,3) (0,2) (3,0)

Player 2
A B C D
1 (5,2) (5,3) (7,5) (6,3)
Player 1

2 (2,0) (6,5) (4,5) (4,3)

3 (0,8) (4,3) (3,7) (5,6)
4 (4,2) (2,2) (3,0) (8,3)
Solve the following game

A B C D
1 38 16 38 18
2 34 52 30 42
3 18 50 14 26