John Nash's Game Theroy

GAME THEORY

Before Nash, economists studied the market using sophisticated versions of Adam Smith's price theory -basic supply and demand. Smith said as "buyers and sellers pursue their self-interest, the "invisible hand" of the market distributes products efficiently".

But price theory can't explain the abundant real-world examples of market inefficiency. Nash approached this problem by reformulating economics as a game.

To most people, a game is a way to while away a rainy afternoon. But to mathematicians, a game is not just chess or poker but any conflict situation that forces participants to develop a strategy to accomplish a goal. 

To mathematicians, a game is a regimented world where math is king. And a game can be a window to mathematical insight. When I was a student, Princeton math professors collected every afternoon in the third-floor lounge for tea and a round of backgammon. Professor Conway told us that he stumbled upon the discovery of a lifetime while studying Go, an ancient board game played with smooth stones. Nash's central insight, the one for which he won a Nobel Prize in 1994, was to prove that every economic game has an equilibrium point — that is, an approach to play in which no player would choose to change his strategy. If a player were to try to change his Nash equilibrium strategy, he would end up worse off than before.