Most people came to know John Nash after the 2001 release of the award-wining movie "A beautiful mind", however, his game theory work has helped economists and people around the world by providing insight into the forces that govern chance and events inside complex systems in daily life.
Arguably his most important work up to date, was the development of the so-called "Nash Equilibrium", which provides a solution to the strategic interaction of non-cooperative decision scenarios. The underlying idea behind this concept is that we cannot predict the outcome of the choices of multiple decision makers if we analyze those decisions in isolation. Instead, we must ask what each participant would do, taking into account the decision-making of the others. The equilibrium is reached when no player has anything to gain by changing only his own strategy unilaterally.
A classic example of the application of John Nash's theory is the famous "Prisoner's dilemma" (see "Investopedia Prisoner's dilemma explanation" for detailed information) where even though there is a globally optimal strategy, this strategy is unstable; so each prisoner ends up betraying the other and finding equilibrium in a sub-optimal outcome.
For most people, these exercises might sound as "boring theories", however the conclusions can be applied to almost any decision-making scenario.
The objective of this article is to use game theory in order to explain why is it so difficult to get people to stop polluting, even though we all agree that the society would be better off if nobody pollutes our planet?.
Assumptions: For simplification purposes let's assume the following:
- There are two participants in the pollution game: You, and everybody else.
- The benefit of a world without pollution can be quantified as a benefit of "5 points".
- The cost or opportunity cost (either money, time or work) of stopping to pollute is of "-2 points".
- As "everybody else" actually represents lots of people (right now about 7 billion citizens), is logic to assume that their potential effect on the environment is greater than yours, so even if you pollute, if everybody else stops doing it, the world will be a cleaner place anyway (you get the 5 points benefit).
Even though the outcome number 3 is the "globally optimal outcome", this outcome is not in equilibrium, because you would be better off by polluting and letting everybody else undertake the costs of "cleaning the world" (5 points vs 3 points).
Finally, as each individual of the "everybody else" group will come to your same conclusion, everybody else will pollute, and leave the rest with the cost of cleaning. This would mean that in the end everybody will pollute, leading the society as a whole to a final equilibrium outcome, the solution number 2.
Even though John Forbes Nash published his equilibrium theory more than 60 years ago, his work and conclusion remain as relevant as ever, as they can be applied to many situations in daily life.
This example might be seen as an oversimplified explanation of a complex issue, however, the behavioral forces that work in this simple example are the same ones that lead our society to a contaminated world, giving an explanation to the commonly formulated question of "Why our society doesn't do what we all know is right?."