What are the limitations of Nash Equilibrium?

What are the limitations of Nash Equilibrium?

Nash Equilibrium has several limitations, such as assuming rationality, lack of dynamic strategies, and not accounting for cooperation.

Can you explain why the assumption of rationality is a limitation?

Sure! The assumption of rationality means that all players are perfectly rational and always make decisions to maximize their utility, which isn't always realistic.

What about situations with multiple equilibria?

In cases with multiple equilibria, it's unclear which equilibrium will be selected, making predictions difficult and less reliable.

Are there any real-world examples where Nash Equilibrium fails?

Yes, examples include the Prisoner's Dilemma, where cooperation leads to better outcomes than the Nash Equilibrium.

How can we address these limitations in practical applications?

One approach is to incorporate behavioral economics, which considers psychological factors and social influences on decision-making.