Equilibrium Is Virtually Useless : An Argument Between The Conceptuality And The Practicality Of Nash Equilibrium
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This is an argument between the conceptuality and the practicality of Nash equilibrium in Economics. To understand it we need to first look into what economics is about, which is the study of social and human interaction and rational decision making quantitatively. Nash equilibrium can act as a tool to provide an insight into such interaction. In the first part of this essay, I am going to evaluate why the statement ‘economics without the concept of Nash equilibrium is conceptually flawed’ is true, by looking into the importance of rationality in economics and the mechanism of the Nash equilibrium. In the second part, I am going to assess why the argument for ‘Economics with the concept of Nash equilibrium is practically useless’ is true…show more content… However, this idea can be a divergence from reality, as in real life it is difficult or even impossible to find such agents that will make perfectly rational decision as reflected by irrational human behaviour. Though the assumption of individuals act rationally is important when analysing economics and interactions. This is because if we don’t assume everyone act rationally, if there’s a loss of welfare, we will not be able to decide whether it is the result of flaw in the structure or just because of irrationality.
Nash equilibrium can be described as the end of the game sequence. Player gains a posteriori experience during the sequences of the game which in turn help them to form the belief and gain knowledge that lead to the end point, the Nash equilibrium, hence there is no further knowledge that can be gained. In the usual finite set of games the marking of the end point, Nash equilibrium, will allow us to make better or optimal decision. If our decision making process doesn’t satisfy the Nash equilibrium, we must always be able to improve our decision and choice that we made till we hit that equilibrium.
For example in the Prisoner dilemma, ‘confess’ is the optimal choice for both players so it is the Nash equilibrium. Though, the combine payoff for both players to confess is lower than if both players to deny, which shows that t he Nash equilibrium can also be Pareto inefficient in a finite game. If there is some way for them to cooperate through