Nash Equilibrium in Layman's Terms

NE is a game theory concept, so it applies to games.  Economists use the word game a bit differently than other people, so you can think of a game as a scenario where more than one player interact with each other and the payoffs (perhaps who wins and who loses and by how much) are determined by the decisions of all the players.  A simple game is played on The Price is Right.  The winner is the player who guesses the number closest to the value of the item without going over.  All four players make a guess and therefore whether or not one player is a winner depends on the value of the item and the guesses of the other three players.  Likewise, paper-rock-scissors is a game.  If you throw rock, your payoff depends on what your opponent throws.

In a NE, no player can increase his own payoff by deviating if everyone else keeps their move the same.  Think about letting just one player (at a time) have a do-over...if they change their move, then we say they have deviated.  Another aspect of NE that hurts brains is that there can be multiple NE in one game.  I am going to describe a two player game for simplicity.

THE GAME:
You and I get to pick an integer between 1 and 9 inclusive.  We do not get to communicate with each other about what we will pick.  Say that you pick a number by writing it down and giving the paper to a person organizing the game.  The payoffs are as follows:  if we pick the same number, then we each get paid that number of dollars (by the person who is organizing the game).  If we pick different numbers then we each have to pay the same number of dollars as the number we picked (to the person organizing the game).

Example 1 payoff:
I pick 5 and you pick 7.  Now I have to pay 5 and you have to pay 7.

Example 2 payoff:
We both pick 4.  Now we both get paid $4.

What about the NE?:
The moves we made in example 1 are not a NE.  If I were allowed to deviate, I would change my pick to 7 and we would both get paid $7.  If you were allowed to deviate then you'd pick 5 and we'd both get $5.  It only takes one of us wanting to deviate to make the scenario a non-NE.  The moves we made in example 2 are a NE.  If either of us were given the chance to deviate (given that the other player cannot change their move) then neither of us would want to because we'd go from getting $4 to paying something which does not make us better off.

Here's the tricky thing...
First of all, you have to get past the idea that this is a simultaneous move game and you will not know what your opponent has chosen until after you have made your move.  Second of all, you might have deduced that any time we both pick the same number in the game above leads to a NE.  That is correct.  There are 9 NEs for that game.  We could settle on any one of them and it would be a NE.  All other choices where we pick different numbers are not NEs because one of us would like to deviate if we knew that the other person would not be able to change his answer.

I hope that helps.  I can answer any questions in the comments.

Note: I've only discussed pure strategy NE because mixed strategy will blow your mind...and I can't say much about it to the lay person except that it would be bad for a player to commit to a strategy such as "always choose paper in paper-rock-scissors" because the opponent would then crush you by always choosing scissors. 

A Terrible Graph

I was looking for a particular brand of melting salt when I came across this webpage.  The graph below is incomprehensible.

I'm not exactly sure what it shows except that Safer Than Salt has higher numbers than Others at 10, 20, 30, and 60 minutes.  Is this the number of fluid ounces melted by a container of salt on the y-axis?  Perhaps it's the number of square feet of ground covered in 1 inch of snow that gets melted...who knows.  This is why it is very important to label your axes.

Intuition for Steady State in the Solow Groth Model, No Math

I gave this explanation to a student whom I was tutoring a couple years back.  I've always liked the idea and decided to make a youtube video after talking to a guy who is teaching macroeconomics at PSU this summer.  Enjoy.

3 Ways to Solve a Problem

I made this video to help my students see that Bayes' Rule really isn't so scary.  It turns out to be arguably the easiest way to solve the problem.

Follow Me on Twitter

I have begun tweeting from @austinboyleecon on Twitter.  I am making "micro posts" there much more frequently than my entries here.

The Economics of Writing in Cursive

This is what a pen used to look like.  In fact, the Spanish word for a pen is "una pluma" which means "a feather." (note:  there are other words for pen as well).  You used to have to dip the feather in a container of ink and scribble down a few words on your paper before the ink was gone and you had to dip your feather in the ink bottle anew.  Every time you lifted the pen from the page, you risked dripping a bit of unwanted ink on your document.  That is the reason why people wrote in cursive.  With cursive, you basically lift the pen from the page only once per word.





These days, nobody uses the quill pen because we have ball point pens that are better in just about every way.  Ball point pens can be placed in a bag and will not leak ink on everything.  They are cheaper, more compact, and longer lasting.  One more improvement that is easy to overlook is its ability to write without dripping ink on the page.  The reason why we print in modern day is that we can afford to pick up our pen every time we write a letter since the pen does not drip unwanted ink on the paper.

Teaching Economics: Long-Run Equilibrium Adjustments in Perfectly Competitive Markets

I just made these videos for some students in my class and figured I would share with the world.  They cover what happens when there is an increase in demand (my constant-cost industry example) or a decrease in demand (my increasing-cost industry example) for a perfectly competitive market that begins in long-run equilibrium.

The videos go over how to make a long-run supply curve.  I think it is particularly useful to see these graphs drawn out as a process instead of seeing the finished product on the page because the snapshot does not give as good of an idea of the process that generates the graph.

Constant-Cost Industry:



Increasing-Cost Industry: