Nobel Prize in Economics

Econintersect:  Two game theorists, Alvin E. Roth, Harvard Business School and Lloyd S. Shapley, UCLA, have won the 2012 Sveriges Riksbank  Prize in Economic Sciences.  The award is popularly called the Nobel Prize in Economics because it is awarded by the same body that awards the official Nobel Prizes, the Royal Swedish Academy of Sciences.

The original Nobel Prizes were established by bequest of Alfred Nobel and have been awarded since 1901.  The Economics Prize was first awarded in 1969 after being established in honor of Alfred Nobel by the Swedish central bank on the occasion of its 300th birthday.

Shapley received the award for his early research that established the usefulness of game theory statistics for determining stable pairing of agents.  Roth, who never worked directly with Shapley extended the pioneers theoretical studies to market applications with empirical investigations of healthcare systems.

The full press release from Royal Swedish Academy of Sciences follows:

Press Release

15 October 2012

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2012 to

Alvin E. Roth
Harvard University, Cambridge, MA, USA, and Harvard Business School, Boston, MA, USA

and

Lloyd S. Shapley
University of California, Los Angeles, CA, USA

“for the theory of stable allocations and the practice of market design”.

Stable allocations – from theory to practice

This year’s Prize concerns a central economic problem: how to match different agents as well as possible. For example, students have to be matched with schools, and donors of human organs with patients in need of a transplant. How can such matching be accomplished as efficiently as possible? What methods are beneficial to what groups? The prize rewards two scholars who have answered these questions on a journey from abstract theory on stable allocations to practical design of market institutions.

Lloyd Shapley used so-called cooperative game theory to study and compare different matching methods. A key issue is to ensure that a matching is stable in the sense that two agents cannot be found who would prefer each other over their current counterparts. Shapley and his colleagues derived specific methods – in particular, the so-called Gale-Shapley algorithm – that always ensure a stable matching. These methods also limit agents’ motives for manipulating the matching process. Shapley was able to show how the specific design of a method may systematically benefit one or the other side of the market.

Alvin Roth recognized that Shapley’s theoretical results could clarify the functioning of important markets in practice. In a series of empirical studies, Roth and his colleagues demonstrated that stability is the key to understanding the success of particular market institutions. Roth was later able to substantiate this conclusion in systematic laboratory experiments. He also helped redesign existing institutions for matching new doctors with hospitals, students with schools, and organ donors with patients. These reforms are all based on the Gale-Shapley algorithm, along with modifications that take into account specific circumstances and ethical restrictions, such as the preclusion of side payments.

Even though these two researchers worked independently of one another, the combination of Shapley’s basic theory and Roth’s empirical investigations, experiments and practical design has generated a flourishing field of research and improved the performance of many markets. This year’s prize is awarded for an outstanding example of economic engineering.

Read more about this year’s prize

Information for the Public Pdf 600 kb

Scientific Background Pdf 600 kb

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Alvin E. Roth, U.S. citizen. Born 1951 in USA. Ph.D. 1974 from Stanford University, Stanford, CA, USA. George Gund Professor of Economics and Business Administration at Harvard University, Cambridge, MA, USA, and Harvard Business School, Boston, MA, USA.
http://kuznets.fas.harvard.edu/~aroth/alroth.html

Lloyd S. Shapley, U.S. citizen. Born 1923 in Cambridge, MA, USA. Ph.D. 1953 from Princeton University, Princeton, NJ, USA. Professor Emeritus at University of California, Los Angeles, CA, USA.
www.econ.ucla.edu/shapley/index.html

The Prize amount: SEK 8 million, to be shared equally between the Laureates.
Contact: Erik Huss, Press Officer, phone +46 8 673 95 44, +46 70 673 96 50, [email protected]
Fredrik All, Editor, Phone +46 8 673 95 63, +46 70 673 95 63, [email protected]

John Lounsbury

Sources:

• Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Nobel.org website)