NASH EQUILIBRIUM

Nash equilibrium in game theory is a situation in which a player will continue with their chosen strategy, having no incentive to deviate from it, after taking into consideration the opponent’s strategy. 

Nash Equilibrium vs. Dominant Strategy

Nash equilibrium is often compared to dominant strategy, both being strategies of game theory. The Nash equilibrium states that the optimal strategy for an actor is to stay the course of their initial strategy while knowing the opponent’s strategy and that all players maintain the same strategy.

Dominant strategy asserts that the chosen strategy of an actor will lead to better results out of all the possible strategies that can be used, regardless of the strategy that the opponent uses.

Both terms are similar but slightly different. Nash equilibrium states that nothing is gained if any of the players change their strategy while all of the other players maintain their strategy. Dominant strategy asserts that a player will choose a strategy that will lead to the best outcome regardless of the strategies that the other players have chosen. Dominant strategy can be included in Nash equilibrium, whereas a Nash equilibrium may not be the best strategy in a game. 

Example of Nash Equilibrium

Imagine a game between Tom and Sam. In this simple game, both players can choose strategy A, to receive $1, or strategy B, to lose $1. Logically, both players choose strategy A and receive a payoff of $1.

If you revealed Sam’s strategy to Tom and vice versa, you see that no player deviates from the original choice. Knowing the other player’s move means little and doesn’t change either player’s behavior. Outcome A represents a Nash equilibrium.