John Nash’s Legacy Lives on in Business Strategy

Game Theory

The insights into human behavior of mathematician John Forbes Nash, Jr. — who died in a car crash last Saturday at 86 — are finding use in an expanding range of situations, from corporate concerns such as strategy, labor negotiations and product pricing to life decisions like marriage and even in devising political strategies against terrorist threats. But two Wharton experts say the wider impact of Nash’s work is just beginning to materialize.

Nash’s body of work in game theory earned him the 1994 Nobel Prize in Economic Sciences along with game theorists Reinhard Selten and John Harsanyi. He became a household name thanks to the 2001 film A Beautiful Mind. Based on the book by Sylvia Nasar, the movie — which won the Academy Award for Best Picture — stars Russell Crowe as Nash and depicts his battles with paranoid schizophrenia.

Wharton management professors Keith W. Weigelt and Louis A. Thomas, who count game theory among their research specialties, discussed why Nash’s work will endure on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Beyond Dominant Strategy

According to Weigelt, before Nash developed his theories in the 1950s, game theory focused on the idea of having a “dominant strategy” where one did not care about the strategies of others in a given setting. “An example of dominant strategy, at least to [Alfred Lord] Tennyson was: ‘Tis better to have loved and lost, than never to have loved at all,'” he said.

Nash, however, argued that one could have better outcomes if he or she formulated a strategy while anticipating the behavior of others. “This allowed us to solve so many more games, because now we didn’t need to have a dominant solution,” said Weigelt. “We could have the ‘Nash common vision’ of what the future looks like.” That vision came to be known as the Nash Equilibrium.

While the idea of a “dominant strategy” that is formulated irrespective of what others choose made a big impact, “it doesn’t allow me to characterize a lot of things we are interested in on a day-to-day basis,” said Thomas. “If I am a manager and I am working on my pricing strategy, my price probably depends on what you as my rival will do. Therefore, I do not have a dominant strategy. I may have a Nash Equilibrium strategy that says my best guess of what you are likely to do will be a guide to what I do — [i.e.,] price high or price low.”

The Nash Equilibrium accommodates “a much richer and broader set of managing strategic outcomes that previously weren’t available to us,” said Thomas.

Equilibrium in Life Decisions

According to Thomas, Nash’s work has affected not only economics and business strategy, but life decisions in general. “In economics, every major field and subfield is impacted by his work.” He noted that Nash’s work influences how prices are determined and how prices determine markets; how wages and workplace strategies are determined; and the formulation of business strategy as it relates to pricing, firm organization, entering new markets and innovation. It is used even in political science, he added, pointing out that the Pentagon and military institutions have used Nash’s work to think about how to deal with the Islamic State group.

Thomas said that the import of Nash’s work came to be realized beyond academic circles only after Nash was awarded the Nobel Prize and A Beautiful Mind was released. “But there are still a lot of people who don’t understand that everyday life decisions will be impacted by what he actually did,” he noted. His students find it useful in making decisions about their class work. Going forward, he added, they will likely find it affecting other decisions, such as what job to take and how to handle their marriages and relationships.

The Nash Equilibrium accommodates “a much richer and broader set of managing strategic outcomes that previously weren’t available to us.” –Louis A. Thomas

Nash’s work also could be used to understand how people think about money, savings, investing or buying a mortgage, said Thomas. Here, money managers could borrow his concepts to understand the motivations of their customers, he added. “Very few people have had such a profound impact on how we make decisions across so many different areas Twitter .”

Influencing Tomorrow’s Leaders

Thomas noted that the many millennials entering the business world have a basic understanding of game theory, since it is now a standard course offering in MBA programs and in most undergraduate business programs. “They are starting to go into places where they make policy decisions and decisions about management and strategy using these tools,” he said. “So the impact of John Nash is still to come, in some senses.”

In the future, Nash’s work will find applications in competitive strategy with “richer detail,” Thomas predicted. “We can look at pricing, organizational design, market entry, decisions to invest in R&D, corporate culture and leadership in a systematic way,” he added. “Game theory is yet to make an impact on these areas, but it is poised to do that. Academic ideas have a lag time of 20 to 40 years, so Nash will begin to have an impact now.”

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