Israeli, American share economics Nobel - East Valley Tribune: Nation / World

Israeli, American share economics Nobel

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Posted: Monday, October 10, 2005 7:37 am | Updated: 9:39 am, Fri Oct 7, 2011.

STOCKHOLM, Sweden - Robert J. Aumann and Thomas C. Schelling won the 2005 Nobel Memorial Prize in Economic Sciences on Monday for their work in game theory that explains political and economic conflicts, arms races and even preventing warfare.

"Why do some groups of individuals, organizations and countries succeed in promoting cooperation while others suffer from conflict?" the Royal Swedish Academy of Sciences said.

Game theory, which is often used in a political or military context to explain conflicts between countries, can also be applied to the business world.

"The understanding of game theory helps explain economic conflicts like price competition and commerce wars," said Jorgen Weibull, chairman of the prize committee. "I think the main impact is on economics, but it also applies to other social sciences."

Aumann, 75, and Schelling, 84, have helped to "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 academy said in its citation.

"The repeated-games approach clarifies the raison d'etre of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements," it said.

"I feel great," said Aumann (OW-man) when reached by telephone in Israel.

Reached by the AP at his home in Bethesda, Md., Schelling - who teaches at the University of Maryland - said he knew his co-winner, but had never worked with him.

"They (the Nobel committee) linked us together because he is a producer of game theory and I am a user of game theory," he said. "I use game theory to help myself understand conflict situations and opportunities."

The academy, in its citation, lauded Schelling for showing "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."

Aumann, who holds American and Israeli citizenship and is a professor at the Center for Rationality at the Hebrew University of Jerusalem, was cited for his work in looking how real-world situations can affect the theory.

Carl-Gustaf Lofgren, a member of the prize committee, said a key principle in Aumann and Schelling's theories was for both parties in a conflict to use credible threats and counterthreats to maintain a peaceful balance.

During the Cold War, for example, the U.S. and the Soviet Union knew that each had long-range missiles capable of a swift counterstrike.

"If you have second-strike capacity, then it makes your opponent think twice," he said.

In the economic world, Aumann and Schelling's work is used to prevent illegal cartels between rival companies, Lofgren said.

Two competitors can use game theory to agree on joint price structures that benefit both parties, thereby eliminating fair competition, Lofgren said. But the theory also lets regulators pick up on signs of collusion and, ultimately, break up illegal cartels.

The academy also highlighted developments in game theory in awarding the 1994 economics prize to Americans John Harsanyi and John Nash and German Reinhard Selten. Nash was portrayed in the 2001 Academy Award-winning film "A Beautiful Mind," starring Russell Crowe.

Lofgren said Aumann's theories differed from Nash's by introducing an infinite repetition of the same game so as to find the best solution in long-term relationships instead of in a single encounter.

The difference is illustrated in the so-called "Prisoner's dilemma," one of game theory's best-known situations in which two partners in crime are put in separate cells and given an ultimatum: If one implicates the other, they may go free while their partner receives a harsh penalty.

Facing that situation once, both prisoners are likely to talk, meaning both would be sentenced.

However, said Lofgren, if they could repeat the situation an infinite number of times and add results of each action, they would realize that the best option is for both to keep mum.

Aumann was born in Frankfurt, Germany, but holds U.S. and Israeli citizenship. He is not the first Israeli to win the economics prize. In 2002, Daniel Kahneman, who also has U.S. and Israeli citizenship, shared the award.

It was the sixth consecutive year that Americans have won the prize.

Last year's winners were Edward C. Prescott, an Arizona State University professor, and Norwegian Finn E. Kydland, an economics professor at the University of California, Santa Barbara, who won for their research on how government policies affect economies around the world and why supply-side shocks like high oil prices can dampen business cycles.

The economics prize, worth 10 million kronor ($1.3 million), is the only one of the Nobel awards not established in the will of Swedish industrialist Alfred Nobel, the inventor of dynamite. The medicine, physics, chemistry, literature and peace prizes were first awarded in 1901, while the economics prize was set up separately by the Swedish central bank in 1968.

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