Ever since I embarked on the journey of studying economics at the collegiate level, I have found myself deeply enthralled in the applications of mathematics (both in the applied math sense and statistics sense) in economics. One of the only reasons why I took ECON 101A was because of the promise of a greater influence in the terms of the mathematics involved (not to mention the smaller class size). I was introduced to the concepts of economics through my AP classes in high school but took great efforts to understand the underlying mathematical principles at play within the general economic theory even when they were not explicitly explained. Concepts such as the relationship between marginal revenue and total revenue, economies of scale, and the monetary money multiplier had intrinsically mathematical (calculus) aspects. The most interesting application of mathematic in economics was Nash Equilibrium in the terms of game theory. Once game theory was introduced in my class, it seemed as if any interaction between firms could be modeled using this newly-minted mental model. Perfect competition, oligopolies, monopolies, and monopolistic competitive firm models seemed to have an added dimension to them because some of their actions could be understood through the lens of game theory. Seeing how game theory changed my view of game theory through the course of my introductory economics class, it is not hard to see how game theory changed the view of economics through the course of history.
I really liked how Mr. Myerson defined the timeline of economic theory before John Nash’s renditioning of game theory and after. I believe that this was a particularly strong literary choice as I think that John Nash did indeed created a distinctive shift in the conceptual understanding of economics. This makes sense seeing how much depth non-cooperative game theory has added to the field of economics, not to mention all the other fields it has added to as well. To this day Nash’s finding is being extrapolated on to transform the topology of economic thinking; the last Nobel Prize in Economics was given to an applied form of limited information game theory called auction theory. A product of Nash’s theories shifted the focus of economics from being purely input and output basted to becoming focused around the actions of firms through their incentives in order to turn a profit which is an impact that finds us still today.
One of my biggest gripes and confusions that I have with economics is regarding the assumption of perfect rationality. Whenever we as economists make a model involving game theory or oligopoly theory or any market model for that matter, we always like to internalize the assumption of perfect rationality that explains that any agent in our model will act within their best interest always. This leaves no room for error, misinformation, self-sabotage, or altruism. This reasoning has always been difficult for me because the way economics was introduced to me was a function that models real-life interactions. My first taste of economics came through macroeconomics in the form of GDP, the stock market, interest rates, recessions, and unemployment. These are very real phenomena, but microeconomics is a different breed altogether. Microeconomic theories come in the form of rigid rules of engagement that different sides of a low-level market (producers, suppliers, households, and governments) abide by. Microeconomics is extremely idealistic and is improbable as a plebiscite for everyday human interaction. To me assuming perfect rationality as an application of everyday interactions is bizarre because we as humans are fallibly erroneous creatures. We often do not know how to act in our best interest, we often self-sabotaging without the underlying understanding that we have done so. If we can learn anything from how humans comprehend games of chance and choice through the birthday problem, the Monty-Hall problem, and the existence of casinos, we can conclude that humans are horrendously bad at comprehending what the optimal choice is in a rational model. Why should we use the assumption of perfect rationality? It makes for very pretty and concise modeling in very simple game mechanics. The extrapolation of microeconomics to real life is problematic at best.
