Game Theory and Markets: Schelling Points and The Nash Equilibrium

Author: Duane M. Tilden, P.Eng.        Date: June 10, 2018

Prologue:  It’s been a few weeks since my last blog post as I have been quite involved in other matters. As part of my work involves research and learning I would like to organize some of my discoveries and thoughts and relate them further by curation and publication on my blog.

Some things that I have been aware of it seems to me, intuitively, are rules which have been previously codified by others. Two now under examination are named after their discoverer’s respectively; Schelling Points and The Nash Equilibrium.  These ideas have profound implications in various forms of trade, microeconomics, macroeconomics, and cryptoeconomics.

Schelling or “Focal” Points

In the study of crowds or markets as an example we will find that there will be a tendency of people to gravitate towards the familiar in the absence of information. Such information is useful in the study of how people tend to behave. This information can also used to make optimal choices between two or more people in games of strategy whether between strangers where the others’ choice is unknown, or between friends or groups who may be more predictable in behaviour.

Image result for grand central station new yorkImage 1:  Grand Central Terminal turned 100 years old in 2013. Photo: Buck Ennis

In my own study of markets and their behaviour it is noticeable that one can postulate certain cycles based on common patterns where conflicts for disposable income can affect the movement of capital in and out of the market. I find that this is very similar to what has been found by Thomas Schelling and is also known as “focal points”.

Image result for thomas schellingImage 2: Thomas Schelling received his Ph.D. from Harvard in 1946 and joined the Harvard faculty in 1958. Photo by Martha Stewart

Thomas Schelling, the Nobel-winning game theorist … found in an informal survey that many of his students tended toward the same answer when posed this question about New York City: they would wait under the clock in Grand Central Station at 12 noon, hoping their partners had the same idea.

He introduced this concept in his 1960 book The Strategy of Conflict as a “focal point” – a solution to a coordination problem that somehow stands out as the natural answer even if the participants don’t have a chance to arrange it beforehand. Schelling argued that people’s apparent ability to coordinate without communicating was key to understanding how real-life strategic games are solved.

As game theory has developed in the decades since, Schelling’s ideas about focal points have been rarely studied, partly because the existence of focal points was perceived more as a mysterious, sociological phenomenon rather than an economic one amenable to analysis.

Schelling argued that people’s apparent ability to coordinate without communicating was key to understanding how real-life strategic games are solved.

Schelling himself said trying to determine the focal point of a game analytically is like trying to use a computer to understand whether a joke will be funny – it depends on cultural context and the relationship of the people trying to coordinate. Even the classic Schelling focal point of Grand Central might not apply if you asked different groups of New Yorkers who lived in different parts of the city or never took the trains that pass through the station.

The Nash Equilibrium

The Nash Equilibrium is a basic solution set which can be identified in every day life through some observation. One of the better examples it the driver matrix on a two-way street, where the optimal solution is for both drivers to drive on the left hand or right hand side of the road. If not, then a collision will likely result as both cars will be moving in opposing directions head-on.

Generally speaking one can view this equilibrium as an expectation that in various scenario’s where a choice is required, the person will behave in their own best interests. Understanding this concept is essential to how incentives work in an economy and how such incentives can be used to modify a person’s behavior, whether in a game, company, group, or a market.

Nash Equilibrium is a term used in game theory to describe an equilibrium where each player’s strategy is optimal given the strategies of all other players. A Nash Equilibrium exists when there is no unilateral profitable deviation from any of the players involved. In other words, no player in the game would take a different action as long as every other player remains the same. Nash Equilibria are self-enforcing; when players are at a Nash Equilibrium they have no desire to move because they will be worse off.




Concern about emissions trading scheme affecting the impact of renewables

See on Scoop.itGreen & Sustainable News

Deep problems in Europe’s carbon trading scheme – its flagship climate change policy – are set to cancel out over 700m tonnes of emissions saved through renewable energy and energy efficiency efforts, according to a new report.

The study, by carbon trading thinktank Sandbag, found that a huge oversupply of carbon pollution permits means many are being banked to enable emissions after 2020, when efforts to tackle global warming should be intensifying. These emissions, nearly equivalent to Germany’s annual carbon pollution, will cancel out efforts made in other areas to cut carbon.

The report also warns that Europe’s emissions trading scheme (ETS) is a “global dumping ground” for “dubious” carbon permits created by projects around the world.

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EU European Commission agrees China solar panel duties in boldest move yet | alternative renewable energy Pakistan

See on Scoop.itGreen & Sustainable News

The European Commission agreed on Wednesday to impose punitive import duties on solar panels from China in a move to guard against what it sees as Chinese dumping of cheap goods in Europe.

Duane Tilden‘s insight:

>Shares in German manufacturers SolarWorld, Phoenix Solar and Centrotherm rose as much as 7 percent on the decision, while Frankfurt-listed shares in China’s Suntech were down more than 4 percent. The investigation into accusations of dumping is the biggest the commission has launched but Brussels is trying to tread a careful path, knowing it needs China, the EU’s second largest trading partner, to help the bloc pull out from recession.

China’s ambassador to the World Trade Organisation, Yi Xiaozhun, called the decision a mistake although he declined to comment on any possible retaliation by Beijing. “It will send the wrong message to the world that protectionism is coming,” Yi told Reuters in Geneva.

Given that Germany and France are seeking to increase exports to China, De Gucht will try for a negotiated solution with new Chinese Commerce Minister Gao Hucheng before an EU deadline in December to cement the levies for up to five years. […]

Chinese solar panel production quadrupled between 2009 and 2011 to more than the entire global demand. EU producers say Chinese companies have captured more than 80 percent of the European market from almost zero a few years ago, exporting 21 billion euros ($27 billion) to the European Union in 2011. <

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Neodymium and Thorium

See on Scoop.itGreen Energy Technologies & Development

Thorium is cheaper than uranium and would allow the USA to manufacture neodymium magnets within the US and brake [sic] China’s grip on the neodymium magnet and ele…

Duane Tilden‘s insight:

Wind and Neodymium

Jack Lifton’s research on mineral resources make him an important figure in projecting the future of energy. Lifton spotted the Lemhi Pass thorium reserve discoveries early on, Lifton has recently focused on world rare earth production, and as Lifton has pointed out, rare earths will play important roles in the future of energy. Lifton pointed out the importance of the rare earth element neodymium for the wind generation industry.

There’s another rare earth metal that’s critically important to our society—neodymium. In 1984, General Motors and Sumitomo developed the neodymium iron boron alloy for permanent magnets, which is the basis of all modern electric motors because it allows you to make a very small electric motor with the highest possible power density. Neodymium total world production is less than 20,000 tons. That may sound like a lot to you, but it’s tiny. And the fact is it’s recently been projected that a single wind turbine electric generator producing 1 megawatt of electricity requires one ton of neodymium.


The liquid fluoride thorium reactor (acronym LFTR; spoken as lifter) is a thermal breeder reactor that uses the thorium fuel cycle in a fluoride-based molten (liquid) salt fuel to achieve high operating temperatures at atmospheric pressure.

The LFTR is a type of thorium molten salt reactor (TMSR). […]

In a LFTR, thorium and uranium-233 are dissolved in carrier salts, forming a liquid fuel. Typical operation sees the liquid fuel salt being pumped between a critical core and an external heat exchanger, where the heat is transferred to a nonradioactive secondary salt, that then transfers its heat again to a steam turbine or closed-cycle gas turbine.[2]

This technology was first investigated at the Oak Ridge National Laboratory Molten-Salt Reactor Experiment in the 1960s. It has recently been the subject of a renewed interest worldwide.[3] Japan, China, the UK, as well as private US, Czech and Australian companies have expressed intent to develop and commercialize the technology.

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