John F. Nash, Jr.: introduction and postscript.

• Author: Holt, Charles A.
• Position: Brief Article

The task of finding a speaker seemed formidable in a year following James Heckman's address to the Southern Economic Association (SEA) only a month after receiving a Nobel prize. I began by asking myself who would be the one economist in the world that people would be most interested in hearing at the meetings. After some discussion with others, the answer became clear. Although Professor Nash's Princeton Ph.D. is in mathematics and he remains a mystery to most of us, he is, after all, the person whose last name is heard in class at least as often as that of Greenspan or Smith. So please forgive me if I refer to him as just Nash, out of habit and lack of personal contact for many years.

The unfolding of this mystery surprised many of us who were at the 2001 SEA meetings in Tampa, Florida. Professor Nash joined a dinner group heading for Ybor City. Over a beer, he was refreshingly candid about his work. Question: "The Nash bargaining solution is a startlingly original theorem because the conclusion, that bargaining will maximize the product of utility differences, seems to be so different from the nature of the axioms about the independence of irrelevant alternatives, or that people maximize expected utility." The answer was that he knew that expected utility had to be invariant to additive and (positive) multiplicative transformations. Thus, utility differences would take out additive constants, and multiplicative constants would factor out of products. With a chuckle, he admitted that the rest was just working back to find the assumptions that would force the only admissible outcome to be equivalent to the maximization of utility increments above threat point levels. This bargaining solutio n is still widely used today, especially in law and economics and the economics of the family, as indicated by Marjorie McElroy's presidential address the next day.

Many economists may not realize that John Nash was one of the first people to become involved in laboratory experiments. One of these experiments, conducted more than fifty years ago, was inspired by his second great accomplishment: the definition and existence proof for Nash equilibrium. This experiment was conducted at the RAND Corporation in Santa Monica, California, on the same day that the two mathematicians who designed it heard about the surprising theorem that had been proved by a young graduate student on the other coast (for details, see Sylvia Nasar's "unauthorized" biography, A...