Think of the bar scene in the movie "A Beautiful Mind." Based on the 2011 biography of John Nash, by Sylvia Nasar, "a drama about the mystery of the human mind, triumph over adversity, and the healing power of love:"
Despite serious mental health issues, John Nash went on to win the Nobel Prize for his work in Game Theory -- which is essentially decision-making based on a certain type of strategy. As one writer -- Roger B. Meyerson defines it, in his book, "Game Theory: Analysis of Conflict," it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers."
In the film, a rather seductive blonde enters the scene with a few other girls. Russell Crowe (playing the role of John Nash) acknowledging that he is at a table with a passel of competitors, observes: "Recall the lessons of Adam Smith," to which the men in unison reply: "Individual ambition serves the common good." But Nash experiences a kind of brainstorm.
"If we all go for the blonde, we block each other, and not a single one of us is going to get her. So then we go for her friends. They will all give us the cold shoulder, because no one likes to be second choice. But what if no one goes for the blonde. We don't get in each other's way, and we don't insult the other girls. It's the only way we win ... Adam Smith said that the best result comes from every one in the group doing what's best for himself. Incomplete! Incomplete, because the best result will come from everyone in the group doing what's best for himself, and for the group."
Essentially, it will be this kind of thinking that will pave the way through the crisis in Syria, and the kind of thinking that will pave the way for peace and prosperity around the globe, in the 21st Century.
The 1994 Nobel Prize in Economic Sciences was awarded to three gentlemen for their work in the field of Game Theory: John C. Harsanyi, Reinhard Selten, and John F. Nash Jr. The presentation speech was given by Professor Karl-Göran Mäler of the Royal Swedish Academy of Sciences:
Your Majesties, Your Royal Highnesses, Ladies and Gentlemen,
Many situations in society, from everyday life to high-level politics, are characterized by what economists call strategic interactions. When there is strategic interaction, the outcome for one agent depends not only on what that agent does, but also very largely on how other agents act or react. A firm that decreases its price to attract more customers will not succeed in this strategy if the other major firms in the market use the same strategy. Whether a political party will be successful in attracting more votes by proposing lower taxes or increased spending will depend on the proposals from other parties. The success of' a central bank which is trying to fight inflation by maintaining a fixed exchange rate depends - as we know - on decisions on fiscal policy, and also on reactions in markets for labor and commodities.
A simple economic example of strategic interaction is where two firms are competing with identical products on the same market. If one firm increases its production, this will make the market price fall and therefore reduce profits for the other firm. The other firm will obviously try to counteract this, for example by increasing its production and so maintaining its market share but at the cost of further reduction in market price. The first company must therefore anticipate this countermove and possible further countermoves when it makes its decision to increase production. Can we predict how the parties will choose their strategies in situations like this?
As early as the 1830s the French economist Auguste Cournot had studied the probable outcome when two firms compete in the same market. Many economists and social scientists subsequently tried to analyze the outcome in other specific forms of strategic interaction. However, prior to the birth of game theory, there was no toolbox that gave scholars access to a general but rigorous method of analyzing different forms of strategic interaction. The situation is totally different now. Scientific journals and advanced textbooks are filled with analyses that build on game theory, as it has been developed by this year's Laureates in economics, John Nash, John Harsanyi and Reinhard Selten.
Non-cooperative game theory deals with situations where the parties cannot make binding agreements. Even in very complicated games, with many parties and many available strategies, it will be possible to describe the outcome in terms of a so-called Nash equilibrium - so named after one of the Laureates. John Nash has shown that there is at least one stable outcome, that is an outcome such that no player can improve his own outcome by choosing a different strategy when all players have correct expectations of each other's strategy. Even if each party acts in an individually rational way, the Nash equilibrium shows that strategic interaction can quite often cause collective irrationality: trade wars or excessive emission of pollutants that threaten the global environment are examples in the international sphere.