"John Nash’s Legacy Lives on in Business Strategy"

From Knowledge@Wharton, May 27:

The insights into human behavior of mathematician John Forbes Nash, Jr. — who died in a car crash last Saturday at 86 — are finding use in an expanding range of situations, from corporate concerns such as strategy, labor negotiations and product pricing to life decisions like marriage and even in devising political strategies against terrorist threats. But two Wharton experts say the wider impact of Nash’s work is just beginning to materialize.

Nash’s body of work in game theory earned him the 1994 Nobel Prize in Economic Sciences along with game theorists Reinhard Selten and John Harsanyi. He became a household name thanks to the 2001 film A Beautiful Mind. Based on the book by Sylvia Nasar, the movie — which won the Academy Award for Best Picture — stars Russell Crowe as Nash and depicts his battles with paranoid schizophrenia.

Wharton management professors Keith W. Weigelt and Louis A. Thomas, who count game theory among their research specialties, discussed why Nash’s work will endure on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Beyond Dominant Strategy
According to Weigelt, before Nash developed his theories in the 1950s, game theory focused on the idea of having a “dominant strategy” where one did not care about the strategies of others in a given setting. “An example of dominant strategy, at least to [Alfred Lord] Tennyson was: ‘Tis better to have loved and lost, than never to have loved at all,'” he said.

Nash, however, argued that one could have better outcomes if he or she formulated a strategy while anticipating the behavior of others. “This allowed us to solve so many more games, because now we didn’t need to have a dominant solution,” said Weigelt. “We could have the ‘Nash common vision’ of what the future looks like.” That vision came to be known as the Nash Equilibrium.

While the idea of a “dominant strategy” that is formulated irrespective of what others choose made a big impact, “it doesn’t allow me to characterize a lot of things we are interested in on a day-to-day basis,” said Thomas. “If I am a manager and I am working on my pricing strategy, my price probably depends on what you as my rival will do. Therefore, I do not have a dominant strategy. I may have a Nash Equilibrium strategy that says my best guess of what you are likely to do will be a guide to what I do — [i.e.,] price high or price low.”...MORE