Radner Equilibrium
Categories: Financial Theory, Econ
Who doesn’t love a good game? Economist Roy Radner was all about the games, especially in the face of uncertainty. In most basic game theory games, the payoffs are clearly written: players can guess what their opponent might do based on the payoffs, which they can use to decide their own strategy based on their available payoffs. Every player for themselves.
With uncertainty, things are different. In the real world, like in business, investing, who you marry...we’re always making bets, since we don’t have all the information. That’s why some are afraid of the dark: they’re not certain about what’s there.
The Radner Equilibrium is a theory that Roy Radner came up with after playing around a lot with uncertainty in games. He concluded that, in theory, if the players have unlimited energy to look at all of their available strategies, then even in uncertain (and necessarily competitive) environments, players can find an optimal allocation of resources.
This is a novel idea...that players can find an optimal allocation of resources in a competitive environment, even facing uncertainty. While the uncertainty is realistic, the unlimited computational energy to explore options is not. If you go to a restaurant with a huge menu, you’re not going to spend an hour really considering each of your options. Just not realistic. Nor is it realistic for firms in the economy.
Theories like the Radner Equilibrium are still great achievements in the grand scheme of things. Isolating one aspect, like uncertainty, leads us to understand it on a greater level.
