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The concept of equilibrium is one of the most central ideas in economics. It is one of the core assumptions in the vast majority of economic models, including models used by policymakers on issues ranging from monetary policy to climate change, trade policy and the minimum wage. But is it a good assumption? In a forthcoming Science Advances paper, Marco Pangallo, Torsten Heinrich and Doyne Farmer investigate this question in the simple framework of games, and show that when the game gets complicated this assumption is problematic. If these results carry over from games to economics, this raises deep questions about when economics models are useful to understand the real world.
Kids love to play tic-tac-toe, but when they are about 8 years old they learn that there is a strategy for the second player that always results in a draw. This strategy is what is called an equilibrium in economics. If all the players in the game are rational they will play an equilibrium strategy. In economics, the word rational means that the player can evaluate every possible move and explore its consequences to their endpoint and choose the best move. Once kids are old enough to discover the…