Economics vs. What We're Doing Today

They're not the same thing.

In class today, we explored advances in negotiation theory, focusing in particular on environmental negotiations.  A foundation of this theory is Nash's 1950 paper that developed a model where two players bargain over the allocation of a "pie".  The solution to his paper is well-known for its elegance and simplicity:  Players will come to a decision that maximises their utility or well-being, taking into account what happens if no agreement is made.


John Nash

We compared Nash's results with Rubenstein's, whose solution, while also pretty straightforward, is much more abstract.  In his game, the optimal allocation depends on the players' relative levels of patience, i.e. their discount factor (which is analagous to their inverse discount rate).  That's where things start to get tricky.

The difference between what Nash created and what Rubenstein derived is that Nash proposed something simple but realistic, in which caveats could be revealed and explicated.  Sure, Rubenstein generalized Nash's results to something more "realistic", but for practical purposes, the solution to his problem depends entirely on something that can't be measured.

Anyway, just a comment.  Tricky formulas and fancy models are nice to look at, and they help make sense of a complicated world when words get jumbled, but it's important to recognize their practical limits.  Economics is useful because it explains what drives human interactions.  That's not an explicit goal of mathematics.