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Game players. Robert Aumann (left) and Thomas Schelling win big.

Economics Nobel Gets in the Game

By: 
Constance Holden
2005-10-11 (All day)

Two players representing different ends of the spectrum in game theory--the modeling of strategic interactions between subjects whose interests are in conflict--will share this year's $1.3 million Nobel Prize in economics: the University of Maryland's Thomas Schelling, and Robert Aumann of Hebrew University in Jerusalem. Schelling, 84, is best known for tackling practical questions, such as arms control, while Aumann, 75, a mathematician, is credited with more theoretical contributions.

Schelling first came to prominence using game theory to analyze the nuclear arms race in the 1950s. He "basically invented the scholarly study of arms control," according to the prize committee, offering such counter-intuitive ideas as "uncertain retaliation is more credible and more efficient than certain retaliation." Schelling led a committee in the 1960s that concluded it would be detrimental to both the U.S. and the USSR to invest in ballistic missile defenses--reasoning that led to the adoption of the 1972 ABM treaty.

"Tom's work is so rich and so varied that you could just about take any public policy and find some contribution he made to it," says fellow Maryland economist Jeffrey Lewis. Lewis says much of Schelling's work has focused on "how the preferences that individual people might have in interacting with others might produce surprising results"--for example, on how weak preferences for living in a mixed neighborhood can result in racial segregation.

Aumann, who will share the prize with Schelling, was cited as "the first to conduct a full-fledged formal analysis of so-called infinitely repeated games"--that is, looking at outcomes not from a single interaction but over the long term. "The repeated-games approach clarifies the raison d'être of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements," said the committee.

Economist Jeffrey Ely of Northwestern University says he thinks Aumann's "most significant contribution" is in the area of "common knowledge"--the fact that interactions from arms races to stock speculation are influenced not just by knowledge but by knowledge about the knowledge of the other players. Aumann also melds his religion with his economics--as in a 1985 paper entitled "Game-Theoretic Analysis of a Bankruptcy Problem from the Talmud."

Related sites
Schelling Web site
Aumann Web site
Nobel Web site with more detailed information

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