What is the difference between nash equilibrium and dominant strategy

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Nash Equilibrium Solution. Dominant Strategy Solution vs. Nash Equilibrium Solution: An Overview Game theory is the science of strategic decision-making in situations that involve more than one actor.

Key Takeaways According to game theory, the dominant strategy is the optimal move for an individual regardless of how other players act. A Nash equilibrium describes the optimal state of the game where both players make optimal moves but now consider the moves of their opponent. A well-known example of where the Nash equilibrium plays out in game theory is the prisoner's dilemma.

Although independent concepts, the dominant strategy could also be the Nash equilibrium. Nash equilibrium can occur when a group fully cooperates or when no members of a group cooperate. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

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Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Related Terms Nash Equilibrium The Nash Equilibrium is a game theory concept where the optimal outcome is when there is no incentive for players to deviate from their initial strategy. Game Theory Definition Game theory is a framework for modeling scenarios in which conflicts of interest exist among the players. Backward Induction In game theory, backward induction is the process of deducing backward from the end of a problem or scenario to infer a sequence of optimal actions.

What Is the Traveler's Dilemma? The traveler's dilemma demonstrates the paradox of rationality—that making decisions illogically often produces a better payoff in game theory. What Is Diner's Dilemma? Diner's dilemma is a situation where several people agree to split the bill before going out to eat and order higher-priced items than they normally would. What Is the Centipede Game? The centipede game in game theory involves two players alternately getting a chance to take the larger share of an increasing money stash.

In a two-person game, this would take into consideration the possible strategies that both players could choose. If neither player changes their strategy knowing all of the information, a Nash equilibrium has occurred. Nash equilibrium is important because it helps a player determine the best payoff in a situation based not only on their decisions but also on the decisions of other parties involved.

Nash equilibrium can be utilized in many facets of life, from business strategies to selling a house to war, and social sciences. There is not a specific formula to calculate the Nash equilibrium, but rather it can be determined by modeling out different scenarios within a given game to determine the payoff of each strategy and which would be the optimal strategy to choose.

The primary limitation of the Nash equilibrium is that it requires an individual to know their opponent's strategy. A Nash equilibrium can only occur if a player chooses to remain with their current strategy if they know their opponent's strategy. In most cases, such as in war, whether that be a military war or a bidding war, an individual rarely knows the opponent's strategy or what they want the outcome to be.

Unlike dominant strategy, the Nash equilibrium doesn't always lead to the most optimal outcome, it just means that an individual chooses the best strategy based on the information they have. Furthermore, in multiple games played with the same opponents, the Nash equilibrium does not take into consideration past behavior, which often predicts future behavior.

The Nash equilibrium is a component of game theory that asserts that a player will continue with their chosen strategy while knowing their opponent's strategy as they have no incentive to change course. The Nash equilibrium can be applied in a variety of real-life situations in determining what the best payoff in a scenario will be based on your decisions as well as your opponent's decisions.

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Example of Nash Equilibrium. Special Considerations. Nash Equilibrium FAQs. Key Takeaways The Nash equilibrium is a decision-making theorem within game theory that states a player can achieve the desired outcome by not deviating from their initial strategy.