# 1-5 Nash Equilibrium Intro

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Hi folks, this is Matt again. And, now we are ready to start solving games, and
making some predictions of how people play, in different settings. And, so we
are talking right now about Nash Equilibrium, which is one of probably the
most basic in standard solution concept of all in all the game theory. Which is named
after John Nash, who was a mathematician in Princeton, and actually some years back
won a Nobel Price, for his work on this subject. And it's a, it's a very basic and
fundamental concept, and in order to sort of motivate it, let's, let's start by just
talking through some a particular game that was described and invented by another
famous person. so this is John, John Maynard Keyne's Beauty Contest game. So
what's the idea here? so let's, let's think of a basic situation that you might
be interested in. and this was one that Keynes described in some detail. So the
idea was you have a stock, you're holding on to it. And the stock price is rising,
that's great. you're an investor, you're trying to make profits off of your stock
holdings. And you begin to believe that maybe the stock is too high to be
justified by the value of the company. So, you're thinking that it's possible this
stock is overvalued, maybe there's a bubble in the market and you're starting
to think about selling. Okay, well you'd like to sell it, but you'd like to wait
until the price is at it's peak. Right, so you'd want to wait until the price is just
where it's going to hit its maximum before you sell it. so you want to get out of the
market just before the other investors do. So this is a game where now you have to
predict what other people think about the stock price and, and what they're going to
do and when they want to get out, so how will they act. How should you respond to
that so, the basic ingredients of Nash equilibrium are going to be having some
prediction of what other players are doing, and then choosing the optimal
strategy in response to that So these are going to be two key ingredients that we
have. so there's a, a very stylized version of this which is known as the, the
Keyne's beauty contest game. where did it come from? Well, actually Keyne's
described the, there was a newspaper in the in, in England that had a contest
where players had to guess Which picture of, of several women other readers would
think was the, the, the most attractive one? So it wasn't to guess what you
thought But what you thought other people were thinking. So, Keyne's likened
investing to this, you, it's not only what you think of, of the stock, but what you
think other people are thinking about the stock that's important in driving your
decisions. Okay, so, so this now is represented by a very simple game which is
played by played by many people. So what's this game look like? Each person gets to
name an integer between one and 100. Okay? So you get to pick a number between one
and 100, it has to be an integer. So one, two, three, etcetera. players are going to
move simultaneously. And the player who names the integer that's closest to
two-thirds of the average integer wins a prize. and the other players get nothing.
So to win this game, you have to guess, you have to guess the average and then
two-thirds of it, right? So you'd want, you want to be right at two-thirds of
whatever the average guess is. So a little bit below the average guess. if there's
two people who happen to hit the same integer that, that's the right one then
ties are going to be broken uniformly at random. So we'll just flip a coin or if
there's three people we'll, we'll roll the dice three sided die, etcetera. Okay, so
how would you play this game? you have to think about what other players are going
to do and then forecast what the best integer is, in a response to that.