Work on 'Game Theory' Wins Nobel Prize for Two Economists

Mario Ritter 14 October 2005

I’m Bob Doughty with the VOA Special English Economics Report.

Thomas Schelling and Robert Aumann will share the Nobel Prize in economics this year. The two men are being honored for their work in developing an economic idea. It is called game theory.

Game theory began as the study of decision-making in competitive situations, like games. John von Neumann [pronounced NOI-mahn] and Oskar Morgenstern linked the theory of games with economic activity more than sixty years ago.

In the nineteen fifties, John Nash developed an idea known as the “Nash equilibrium.” The Nash equilibrium is the point where all sides in a competitive situation believe they have been given the best offer they will ever get. He proved this with mathematical methods. Mister Nash won the Nobel Prize in economics with two other men in nineteen ninety-four.

Mister Schelling used the ideas of game theory to study real-life problems, such as the arms competition between the United States and the Soviet Union forty years ago. He was interested in what influenced negotiating groups. He showed how one side might decide to harm its interests for a short period of time to make gains over a longer period.

Mister Schelling also used game theory to show how people become divided by race. He found that divided societies can result even among persons mostly willing to live near people of another race.

Mister Aumann developed game theory mathematically so that it can be useful for different areas of study. He showed that peaceful cooperation can provide good results for all competitors in a game over a long period. This is true even among competitors with a temporary conflict of interest. Mister Aumann also considered how reasonable decisions are made among groups. He showed that knowing what competitors know is important to decision-making.

The work of both men has influenced areas of study other than economics. International negotiators, military planners, business leaders and biologists use methods developed by Misters Schelling and Aumann.

Mister Schelling, an American, is a retired professor of the University of Maryland. Mister Aumann is a citizen of both the United States and Israel. He is a retired professor of the Hebrew University of Jerusalem.

This VOA Special English Economics Report was written by Mario Ritter. I'm Bob Doughty.