Tuesday, April 28, 2020

A Question on Nash Equilibrium and on COVID-19

John Nash
Mike Cheel emails:

[Q.1] I was looking at this link:  https://en.wikipedia.org/wiki/Nash_equilibrium

"Game theorists use Nash equilibrium to analyze the outcome of the strategic interaction of several decision makers. In a strategic interaction, the outcome for each decisionmaker depends on the decisions of the others as well as his own. The simple insight underlying Nash's idea is that one cannot predict the choices of multiple decision makers if one analyzes those decisions in isolation. Instead, one must ask what each player would do taking into account what he expects the others to do. Nash equilibrium requires that their choices be consistent: no player wishes to undo his decision given what the others are deciding."

It seems to me that this has some (or maybe many) parallels with Austrian Economics and the idea that no one can say with certainty how a market will act because of the calculation problem (I think that is what it is called where no one can possibly know how individual actors will act). I was wondering what you take on this was (how it relates).

[Q.2] And second, covid-19 related, I have recently heard that the reason for many of the shortages right now is because big companies that produce for both commercial and to retail customer (e.g. toilet paper) typically produce vastly more product for their commercial lines versus the retail ones. The example used was that most people spend their active lives away from home (at work, restaurants, stadiums, bars, etc) and so the commercial market compared to the retail is much, much larger. The folks who were hoarding toilet paper were basically just adjusting to the reality that they will not spend most of their active time at home. 
I was wondering what you thought about that explanation and also, if it is primarily true, why goods that have a long shelf life are not being rerouted. Instead we have supermarket companies saying they are ordering as much new stuff as they can and stocking it as fast as they can. The shelves are still pretty much empty for these items.

I also want to note that right after this started, a guy in my area was parked on the state road in plain view with a sign (I saw many face book posts about him) who supposedly was the main commercial seller around my area for toilet paper and because of the shutdowns he was selling to the public (at a normal cost).

RW response:

Response to Q1:

Actually, Nash created a model where you would know what all players would do.

It is going in an even worse direction away from Austrian thinking than the simpler models of basic game theory. It is a multi-dimension play model.

It is important to know that game theory was invented by John von Neumann and Oskar Morgenstern and Nash Equilibrium takes game theory deeper.

Hayek was not impressed with any economic applications of game theory.

He said (p.148):
I don't want to be unkind to my old friend, the late Oskar Morgenstern, but while I think his book is a great mathematical achievement, the first chapter which deals with economics is just wrong. I don't think that game theory has really made an important contribution to economics, but it is a very interesting mathematical discipline.
Now, here is where things get really interesting, von Neumann (whose theory Hayek basically rejected for economic applications) rejected Nash's equilibrium deeper take on game theory. He called it trivial.

It is all mental gymnastics that have neither practical nor theoretical use.

Response to Q2:

I don't believe those hoarding toilet paper etc. were thinking about changes in distribution channels as much as just fearing lack of supply.

They went from just in time stocking of toilet paper etc. to stocking up until the second coming. I find myself buying multiple quantities of everyday products because I don't know what there will be a run on next without knowing the specifics of any supply distributions.

That said, there also has to be a shifting of distribution lines from commercial to consumer outlets as the point of demand shifts for some products but this is more difficult than it should be because of government regulations and the government banning of "price gouging" which does nothing but eliminate what I call "A Team" entrepreneurs appearing in these sectors who would figure out pronto how to get product to consumers. (SEE: There is Plenty of Toilet Paper)


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