The Theory And Nash Equilibrium On The Economics Of The Past And Today

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Last century and with no doubts this very one, can be characterized by the ever increasing extent of human interconnectivity. Economic perspective may seem to suggest the need to be able to reflect and systematically model the outcomes of these interactive situations. (Ross, 1997) A significant contribution to understanding the above-mentioned changes has been done by John Nash and his followers who developed the concept of Game Theory and Nash Equilibrium in particular. For the purpose of this essay, the Game Theory would be defined as “study of decision-making where several players must make choices that potentially affect the interests of the other players” (Turocy and Stengel, 2001). The Nash’s equilibrium would be referred as ‘the combination of strategies in a game such that neither player has any incentive to change strategies given the strategy of his opponent.’ (Frank, 2008) This essay aims to evaluate the importance of the Nash equilibrium’s implications to the economics of the past and today as well as to access it’s practical usefulness in relation to one of the concept’s core inherent assumption, namely unbounded rationality.

The importance of Nash equilibrium can be highlighted through the analysis of limitations specifically related to the economic models prior to the advent of game theory. Economists of Adam Smith’s time first achieved a higher degree of analytical capacity by using mathematical methodology of linear algebra to analyse allocation of goods…

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