Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online Views/  Economics Nobel: A win for a contrarian tradition
BackBack

Economics Nobel: A win for a contrarian tradition

Roth and Shapley’s triumph celebrates a long-ignored tradition in Game Theory: the theory of cooperative games

A caricature of the winners of 2012 Nobel Prize in economics, Alvin Roth (left) and Lloyd Shapley. All the prizes awarded to game theorists so far celebrate non-cooperative game theory. Photo: nobelprize.org. (nobelprize.org.)Premium
A caricature of the winners of 2012 Nobel Prize in economics, Alvin Roth (left) and Lloyd Shapley. All the prizes awarded to game theorists so far celebrate non-cooperative game theory. Photo: nobelprize.org.
(nobelprize.org.)

The award of the 2012 Nobel Prize in economics to Alvin Roth and Lloyd Shapley celebrates a long-ignored tradition in Game Theory: the theory of cooperative games. The award to Shapley, in particular, rights a wrong for he, along with John Nash Jr, is widely regarded as pioneer of the subject.

All the prizes awarded to game theorists so far celebrate non-cooperative game theory. The emphasis in this tradition is on how individuals strategize with a single-minded focus to maximize their gains. Simply put, the idea for each player is to “win" by choosing the best strategy available.

Prisoner’s Dilemma is perhaps the best known example of a non-cooperative game. The game is particularly instructive in light of the prize to Roth and Shapley. It is taught as an example of how it is impossible to find cooperative solutions in such games. In the classroom variant, two prisoners have the option of not confessing to a crime and getting away scot free. Yet they end up finking against each other and serve a tough sentence. Lack of trust and “finking" being a dominant strategy ensures the worst outcome for the two prisoners.

Viewed from the cooperative games perspective, both prisoners can trust each other and form a coalition against the police. By not confessing, they cooperate with each other and get away without any punishment.

Cooperative games of the kind studied by Roth and Shapley look at solutions to problems such as dividing a cake among many persons, something that has been elaborated into more complex problems such as voting; the economics of sharing scarce resources; and generalized solutions to the problem of “fairness".

Roth is best known for his study of matching doctors to the most appropriate hospital. Unfettered competition between hospitals for the best residents and the residents for getting accepted in the hospitals of their choice led to inferior outcomes year after year. Roth’s solution—later turned into a matching algorithm by the National Resident Matching Program, a NGO—was one solution to this problem.

Shapley—who wrote his first paper on the subject in the 1950s—gave a solution concept for cooperative games. It explores issues of bargaining in coalitions and has been used to analyze novel schemes that can overcome the problem of “free riding" in such situations.

I was a little surprised by the announcement, but perhaps even the Nobel Committee is worried about the consequences of unfettered capitalism of the kind that usual game theory (non-cooperative games) celebrates.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 15 Oct 2012, 06:41 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App