Covid-19, Russell Crowe, Game Theory and Toilet Paper.
In traditional economics, people are assumed to act rationally. The demand of a product matches its rate of use. If the supply of a product matches use, and therefore demand, then there should be no shortage. Traditional economics cannot explain the current shortages in our supermarkets and could not have predicted it. For an explanation we need to turn to game theory.
Game theory is the study of mathematic models of strategic decision making amongst rational decision makers. While supermarket shelves are stocked, people feel confident they can buy things they need whenever they want, and so only buy what they need. Once authorities advised people to stock up in preparation for a period in isolation, then some things started to become scarce in supermarkets (in this case toilet paper initially). People lost confidence in their ability to buy things when they needed it and started to buy things when it was available. This made the scarcity a self-fulfilling prophesy.
In game theory a situation where everybody assumes to know the strategies of everyone else and nobody has anything to gain by changing their strategy is called a Nash Equilibrium. The traditional situation in supermarkets is a Nash Equilibrium, but also the current shortages are a Nash Equilibrium under the changed conditions. This phenomenon is named after John Nash, the guy depicted by Russell Crowe in the movie ‘A Simple Mind’. Nash’s insight was that even though panic buying is irrational from a group point of view, each individual in the group is still acting rationally according to their own interests. Most people were rational before the panic buying started and most people are still acting rationally, it is just the ‘rules of the game’ that have changed.
There are several advantages to thinking about the current shortages in terms of game theory;
1. Recognise that most people are still acting rationally. It is just that the ‘rules of the game’ have changed. Don’t be too hard on people, they are just trying to cope as best they can.
2. Recognise we are in a new Nash Equilibrium, which is a stable state. The shortages won’t necessarily end anytime soon and it may take a long period of rationing to re-establish the previous Nash Equilibrium. The important thing is that people will have to once again feel confident that they can buy the things they need whenever they want them. This cannot happen while supermarket shelves remain empty.
3. Ideally, these phenomena should be predictable ahead of time. Hopefully governments everywhere will see the value in retaining public servants who understand complex issues like game theory in economics. A little bit of advice about game theory before the government advised everyone to stock up for a period of isolation could have saved us all a fair bit of trouble.
