Two Game Theorists Win the Nobel Prize for Economics

An American and an American Israeli were awarded the Nobel Memorial Prize in Economic Sciences on Monday for fostering the understanding of conflict and cooperation -- in matters such as nuclear arms races, trade battles or price wars.

Thomas C. Schelling, 84, an emeritus professor at the University of Maryland and Harvard University, and Robert J. Aumann, 75, an emeritus professor at Hebrew University of Jerusalem, used “game theory” as a way to explain social, political and business interactions.

Working separately, the pair have “enhanced our understanding of conflict and cooperation through game-theory analysis,” the Royal Swedish Academy of Sciences said in its prize citation.

Game theory is a branch of mathematics and social science that tries to explain actions and decisions in terms of choices that players may make. It can sometimes show why a counterintuitive choice might be better.

Schelling, a political economist, and Aumann, a mathematician, took different approaches in trying to explain why sometimes it was in the best long-term interest of players to foster cooperation rather than confrontation.

For example, two countries that trade together could find themselves in conflict over a specific product. Traditional power politics would argue that one country should force the other to bow to its will.

But Schelling, in his 1960 book “The Strategy of Conflict,” explained that a party could have long-term success by giving up some short-term advantages, even if that meant worsening its own options. By making concessions, the stronger party could build trust with the other party and that long-term relationship could be more beneficial to both.

The work has had an effect on issues such as nuclear proliferation and building so-called confidence steps in the hope of resolving ethnic and social divisions in the Middle East. It also helps explain why housing segregation continues to be a problem, even in areas where residents say they have no extreme prejudice toward another group.

Schelling, who was born in Oakland and worked for the U.S. government on the Marshall Plan to rebuild Europe after World War II, said at a news conference Monday that his greatest influence had been in nuclear deterrence. His use of game theory explains why no nation would use a nuclear weapon because retribution would be assured.

Even today, deterrence would probably prevent nations such as Iran or North Korea from using nuclear weapons, he said.

“Iran’s main use of nuclear weapons is to hold them in reserve or as a deterrent to make sure they do not get into a war with the United States or Russia,” Schelling said.

As a mathematician, Aumann’s contribution was to put the power of numerical analysis behind social insights. He showed that peaceful cooperation is often an equilibrium solution in a game played many times. His use of the theory of “repeated games” has become a common framework for analyzing cooperation.

“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,” the academy said.

“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,” it said.

Aumann’s work has been used to explain issues including how competing companies can cooperate to maintain high prices and how countries can enter into environmental agreements, even if some domestic industries are hurt.

He is a philosophical heir of the Frankfurt School tradition of focusing on the role of knowledge and information in explaining social situations. Aumann studied how what one player knows about the other can influence the decision-making process.

In a primitive example, two players are betting on poker. One knows the other is inclined to bluff with certain low cards, but not with others. He then formulates his betting strategy accordingly.

Born in Frankfurt, Germany, and now a dual U.S. and Israeli citizen, Aumann is also a member of Hebrew University of Jerusalem’s interdisciplinary Center for the Study of Rationality. He is an observant Jew who said he once considered studying to become a Talmudic scholar. His family fled Nazi Germany in 1938 and settled in the United States.

During a news conference Monday in Jerusalem, Aumann said conflict in the Middle East was perfect fodder for game-theory analysis of continuing conflict.

“That’s what it is. It’s an ongoing conflict,” said Aumann, with a lively demeanor and a white beard that reaches to his breast pocket. “It’s been going on for at least 80 years -- more than 80 years. As far as I can see, it’s going to go on for at least another 80 years.”

Americans have now won the economics prize for six consecutive years. The prize, worth about $1.3 million, is the only one of the Nobel awards not established by Swedish industrialist Alfred Nobel. It was created in 1968 by the Swedish central bank but is awarded through the Royal Swedish Academy of Sciences, as are the other Nobel Prizes.

Muskal reported from Los Angeles and Ellingwood from Jerusalem.

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A look at the laureates

Robert J. Aumann

Born: June 8, 1930, in Frankfurt, Germany

Home: Israel

Position: Professor of mathematics, Hebrew University of Jerusalem

Education: Bachelor’s degree, City College of New York, 1950; doctorate, MIT, 1955

Key works: “Values of Non-Atomic Games,” 1974; “Repeated Games with Incomplete Information,” 1995*

Thomas C. Schelling

Born: April 14, 1921, in Oakland

Home: Bethesda, Md.

Position: Emeritus professor, University of Maryland and Harvard University

Education: Bachelor’s degree, UC Berkeley, 1943; doctorate, Harvard, 1951

Key works: “The Strategy of Conflict,” 1960; “Arms and Influence,” 1966

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Compiled by Times research librarian Scott Wilson

Los Angeles Times