News & Views item - October 2005

 

 

Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 2005 Goes to Robert Aumann and Thomas Schelling. (October 11, 2005)

     The "Nobel Prize for Economics" for 2005 has been awarded to Robert Aumann of the Center for Rationality, Hebrew University of Jerusalem and Thomas Schelling at the Department of Economics and School of Public Policy, University of Maryland "for having enhanced our understanding of conflict and cooperation through game-theory analysis".

 

By way of explanation for this year's award the Royal Swedish Academy of Sciences asks the rhetorical question, "Why do some groups of individuals, organizations and countries succeed in promoting cooperation while others suffer from conflict?" And explains, "The work of Robert Aumann and Thomas Schelling has established game theory – or interactive decision theory – as the dominant approach to this age-old question."

 

The Academy's media release describes Schellings contribution as:

 

Against the backdrop of the nuclear arms race in the late 1950s, Thomas Schelling's book The Strategy of Conflict set forth his vision of game theory as a unifying framework for the social sciences. Schelling showed that a party can strengthen its position by overtly worsening its own options, that the capability to retaliate can be more useful than the ability to resist an attack, and that uncertain retaliation is more credible and more efficient than certain retaliation. These insights have proven to be of great relevance for conflict resolution and efforts to avoid war.

 

Schelling's work prompted new developments in game theory and accelerated its use and application throughout the social sciences. Notably, his analysis of strategic commitments has explained a wide range of phenomena, from the competitive strategies of firms to the delegation of political decision power.

 

 

For his part Aumann showed that:

 

In many real-world situations, cooperation may be easier to sustain in a long-term relationship than in a single encounter. Analyses of short-run games are, thus, often too restrictive. Robert Aumann was the first to conduct a full-fledged formal analysis of so-called infinitely repeated games. His research identified exactly what outcomes can be upheld over time in long-run relations.

 

The theory of repeated games enhances our understanding of the prerequisites for cooperation: Why it is more difficult when there are many participants, when they interact infrequently, when interaction is likely to be broken off, when the time horizon is short or when others' actions cannot be clearly observed. Insights into these issues help explain economic conflicts such as price wars and trade wars, as well as why some communities are more successful than others in managing common-pool resources. The repeated-games approach clarifies the raison d’ętre of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements.

 

 

 

An overview of the contributions of Schelling and Aumann is available at http://nobelprize.org/economics/laureates/2005/ecoadv05.pdf  while a more detailed assessment of their insights is given at http://nobelprize.org/economics/laureates/2005/ecoadv05.pdf.