Contents
Many plans act as if the world were a stage on which only you move. You decide; the others don’t react. In reality, competitors, colleagues and negotiating partners are thinking just as hard as you are. Few people have done more than John Forbes Nash to show how to account for this mutual dependence – a story of Strategic Interdependence.
A graduate student at Princeton
Situation
John Nash comes to Princeton in 1948 as a graduate student in mathematics. A new field is being discussed there: game theory. In 1944, the mathematician John von Neumann and the economist Oskar Morgenstern had published their book “Theory of Games and Economic Behavior.” It laid the foundation for studying economic behavior as a game between several decision-makers. In 1950, Nash completes his dissertation, “Non-cooperative Games.” His results appear in two short papers, in the Proceedings of the National Academy of Sciences (1950) and in the Annals of Mathematics (1951).
Link to the principle
Von Neumann and Morgenstern had laid down the basic idea: whoever decides must include the decisions of the others in their calculations. That is exactly what strategic interdependence is. Nash went further and asked: what does a stable outcome look like when everyone thinks this way?
What was missing before
Situation
The 1944 theory was strongest for games in which one side’s gain is the other’s loss, and for situations in which players can make binding agreements. Many real situations are different. Competitors cannot make binding agreements with each other, and both can win or lose at the same time. Nash therefore drew a clear distinction between cooperative games, in which binding agreements are possible, and non-cooperative games, in which each player decides alone.
Link to the principle
This distinction is crucial in practice. In most situations, you cannot force the other side to stick to anything. You have to expect them to do what is good for them, given what you do.
The equilibrium: no one does better alone
Situation
Nash formulated a solution concept for any number of players with any interests. Today it is called the Nash equilibrium. It describes a state in which all players’ expectations are fulfilled and every chosen strategy is the best response to the strategies of the others. No one can improve their position by deviating alone. Nash also proved that every finite game has at least one such equilibrium if randomly mixed strategies are allowed as well.
Link to the principle
The equilibrium is the most precise form of the principle. Your best choice does not exist in itself. It exists only as a response to the choices of the others. If you plan a price cut, a campaign or an offer without playing through the other side’s response, you are planning for a game that does not exist.
Why an equilibrium can be bad
Situation
In that same year, 1950, Merrill Flood and Melvin Dresher at the RAND Corporation studied a simple game that Albert W. Tucker soon afterward recast as a story: the prisoner’s dilemma. Two suspects are interrogated separately. Each is better off confessing, no matter what the other does. If both confess, both end up worse off than if both had stayed silent. The equilibrium is stable, but bad for both.
Link to the principle
Interdependence does not mean that the outcome will be the best one for everyone. Often, smart individual behavior leads into a shared trap. If you recognize this, you look for ways to change the rules of the game: through repetition, trust, contracts or oversight.
The late Nobel Prize
Situation
In 1959, Nash is diagnosed with schizophrenia. For many years, he is barely able to do scientific work. In 1994, together with John C. Harsanyi and Reinhard Selten, he receives the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Selten had refined Nash’s concept to weed out threats that are not credible; Harsanyi showed how to analyze games with incomplete information. In 2001, the movie “A Beautiful Mind” makes Nash’s life known around the world.
Link to the principle
The prize honors not a single formula but a way of thinking that is now taken for granted in competition law, auctions, negotiations and politics: you never decide alone.
Key takeaways
Key lessons
- With every plan, ask: what will the other side do if I do this?
- Your best choice is always a response to the choices of the others.
- Don’t expect others to cooperate just because it would be better for everyone.
- A stable state can be bad for everyone. Then you have to change the rules, not just your move.
- Play through the responses before you act, not afterward.
Summary
In 1950, John Nash showed how to describe situations in which every participant depends on the actions of all the others. His equilibrium is the state in which no one can do better alone. The prisoner’s dilemma shows that such a state can also be bad for everyone. For you, this means: never plan as if the other side would stand still.
Sources
- John von Neumann and Oskar Morgenstern: Theory of Games and Economic Behavior. Princeton: Princeton University Press 1944.
- John F. Nash: Equilibrium Points in n-Person Games. In: Proceedings of the National Academy of Sciences 36 (1950), pp. 48–49.
- John F. Nash: Non-Cooperative Games. In: Annals of Mathematics 54 (1951), pp. 286–295.
- Sylvia Nasar: A Beautiful Mind. New York: Simon & Schuster 1998.
