Nash equilibria
(solutions) are the most stable (it is where the system "settles down",
to borrow from Chaos Theory) - but they are not guaranteed to be the
most desirable. Consider the famous "Prisoners' Dilemma" in which both
players play rationally and reach the Nash equilibrium only to discover
that they could have done much better by collaborating (that is, by
playing irrationally). Instead, they adopt the "Paretto-dominated", or
the "Paretto-optimal", sub-optimal solution. Any outside interference
with the game (for instance, legislation) will be construed as creating
a NEW game, not as pushing the players to adopt a "Paretto-superior"
solution.
The behaviour of the players reveals to us their order of preferences.
This is called "Preference Ordering" or "Revealed Preference Theory".
Agents are faced with sets of possible states of the world
(=allocations of resources, to be more economically inclined). These
are called "Bundles". In certain cases they can trade their bundles,
swap them with others. The evidence of these swaps will inevitably
reveal to us the order of priorities of the agent. All the bundles that
enjoy the same ranking by a given agent - are this agent's
"Indifference Sets".
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