John Forbes Nash, the mathematician who inspired the movie “A Beautiful Mind,” and his wife, Alicia, died in a freak car accident over the weekend.
He was 86, but remained active and had just returned from Norway where he was receiving an award. While the Hollywood dramatization of his life secured his fame among the masses, it is his groundbreaking mathematical and economic theories that will keep his legacy alive for centuries to come.
Born in 1928 in West Virginia, Nash was truly one of the top mathematicians of the past 100 years. He struggled with paranoid schizophrenia for a number of years, but was still able to develop theories that literally opened up new fields of study in both math and economics. In fact, he received the Nobel Prize in Economics in 1994 for what was essentially his 27-page doctoral dissertation in mathematics. Other Nobel Prizes have been won by economists building on Nash’s work. However, the relevance of his ideas extends far beyond universities and think tanks and permeates our lives every day.
The key set of ideas pushed dramatically forward by John Nash and his work is commonly known as “game theory.” Traditional economic theory such as that espoused by Adam Smith and his followers, which was based on the principles of natural law that evolved in the late 17th and early 18th centuries, generally teaches that because economic agents (consumers, producers, workers, investors, etc.) naturally pursue their own self-interest, things work out in an optimal way for society as a whole. While this view explains the underlying logic of markets quite well, it gives us mere mortals far too much credit for being rational automatons and essentially has each of us making decisions in a vacuum. Game theory is an effort to give these basic ideas more “real world” meaning, albeit in a highly mathematical and esoteric way.
The basic notion behind game theory is simply that many aspects of human behavior (economic or otherwise) and even natural phenomena can be thought of in terms of games. As a practical matter, we typically make decisions based not only on how we would like things to be, but on how others will react. Since we don’t know exactly what other people will do, this process gives us a lot of choices and uncertain outcomes. We do the best we can, and game theory helps us define strategies and predict outcomes. You probably don’t think about it, but you practice game theory multiple times every day, such as when you evaluate how to approach a topic at a staff meeting; decide whether to pay extra for priority boarding for a flight; plan a route through traffic; or make an offer on a house, car, or other item.
The same can be said of states, nations, companies, and a host of other institutions. In essence, we are all constantly involved in playing multiple and often overlapping games. This process is applicable to everything from economics to social interaction to family dynamics to trade negotiations to war and peace. A greater understanding of the underlying logic of these matters can help to improve outcomes in all areas of life.
The idea of game theory was originally laid out in a seminal book by Jon Von Neumann and Oskar Morgenstern (The Theory of Games and Economic Behavior) in the 1940s. John Nash conceptualized bargaining scenarios and spelled out conditions in which competitive games would lead to a stable outcome (equilibrium) even when people did not cooperate. Subsequent studies by other economists have dealt with how game theory could help determine the most efficient procedures for allocating resources based on available information and the incentives of those individuals or groups involved. Other researchers have explored how game theory is essential to helping economists, governments, and businesses better distinguish situations where markets work well from instances when they do not. It is currently being widely applied in coming to grips with environmental challenges throughout the world.
He made other pathbreaking contributions as well and had one of those unique and facile minds that could attack a problem in novel ways that others didn’t see. He was not bound by traditional approaches or arbitrary rules. He was not prolific, but he was profound. In the past few days, some commentators have placed him in the pantheon of his Princeton colleague Albert Einstein and John Maynard Keynes as the greatest minds of the past century. At his best, it is hard to argue that point.
I was saddened to hear of the untimely death of John and Alicia Nash. The fields of economics and mathematics owe him a major debt, and the ideas and theories in his work and those he inspired have made and will continue to make the world a better place for all of us.