Tuesday, October 23, 2012

Nobel Prize in Economics - 2012

Two US Economists, Loyd Shapley and Alvin E Roth shared the Nobel Memorial Prize in Economic Sciences for 2012.  Though, I haven't read the works of these Economists, I started reading about their work recently and thought of sharing some interesting points with my readers.  This year's Nobel Prize represents simultaneous recognition for theory and practice.  While Shapely's research along with David Gale in game theory developed the foundation for the theory of match making, Roth applied this theory to various practical situations.

The most interesting part of their research is that it deals with a slightly different aspect of economics compared to the traditional one.  We all learn in basic economics the theory of demand and supply with price as the meeting point.  But Shapley and Gale recognised many situations, where the matching of demand and supply is not done based on price, but other considerations.  Their most influential paper of 1962 discussed the cases of college admissions and stability of marriage.  We can see that in the decisions like marriage, choosing a college etc, the demand and supply interaction (or match making) is not based on price.  They started by asking 'can we develop an algorithm where, from a group of men and women willing to get married, the matching is done in such a way that no individual would have chosen any other individual as their partner?'.  In other words a perfect match making would be possible.  We may wonder, in what way mathematics could help in this process; but that is exactly what Shapley and Gale proved.  Needless to say, in practical life, the model had its own limitations in case of marriages.  However, there were many other situations of match making, where this model proved extremely useful.  That is what Roth did by applying the the above theory to various cases like school admission, kidney transplantation, placement of medical graduates to hospitals etc.  So, Roth was actually putting into practice, what Shapley had developed two decades ago.

There is another speciality for this year's Nobel.  Till now as many as seven economists have won Nobel Prize in Economics for research based on game theory.  But all of them represented research in non-cooperative games, where the objective is to develop strategies for one party to maximize his/her gain.  But this is the first time, two researchers have been awarded the prize for research on cooperative games.  Probably it is time the world starts looking for alternatives from the 'cooperative win-win game models', as Siddharth Singh wrote in Live Mint: 'I was a little surprised by the announcement, but perhaps, the Nobel committee is worried about the consequences of unfettered capitalism of the kind that usual game theory (non-cooperative games) celebrates'. 

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