Nobel prize in economics to Alvin Roth and Lloyd Shapley

The 2012 Nobel prize in economics has been awarded today to Alvin Roth from Harvard and Lloyd Shapley from UCLA for their contributions in "the theory of stable allocations and the practice of market design". What this means is the following:

"This year’s Prize to Lloyd Shapley and Alvin Roth extends from abstract theory developed in the 1960s, over empirical work in the 1980s, to ongoing efforts to find practical solutions to real-world problems. Examples include the assignment of new doctors to hospitals, students to schools, and human organs for transplant to recipients. Lloyd Shapley made the early theoretical contributions, which were unexpectedly adopted two decades later when Alvin Roth investigated the market for U.S. doctors. His findings generated further analytical developments, as well as practical design of market institutions."


So it was a successful empirical application from Al Roth, based on a game theory approach from Shapley (something called the Gale-Shapley algorithm). This explains how in certain situations when the price mechanism fails to allocate resources efficiently, some individuals can still cooperatively reach an efficient equilibrium allocation. The application for this in the real world is allocation of kidneys to patients for example, or students to high schools, or matching in marriage between couples. See here for a really good explanation of the ideas, or read it from Alex Tabarrok at Marginal Revolution: 
"The field of matching may be said to start with the Gale-Shapley deferred choice algorithm. Here is how it works, applied to men and women and marriage... Each man proposes to his first ranked choice. Each woman rejects any unacceptable proposals but defers accepting her remaining suitors. Each rejected man proposes to his second ranked choice. Each woman now rejects again any unacceptable proposals, which may include previous suitors who have now become unacceptable. The process repeats until no further proposals are made; each woman then accepts her most preferred suitors and the matches are made. 
....
What Roth has done is extend the Gale-Shapley algorithm to more complicated matches and to actually design such algorithms to solve real problems. In the 1970s, for example, the medical residency algorithm began to run into trouble because of a new development, the dual career couple. How to match couples, both doctors, to hospitals in the same city? By the 1990s assortative matching in the marriage market was beginning to derail matching in the doctor-hospital market! Roth was called in to solve the problem and moved from being a theorist to a market designer. Roth and Peranson designed the matching algorithm that is now used by Orthodontists, Psychologists, Pharmacists, Radiologists, Pediatric surgeons and many other medical specialties in the United States.
Most famously, Roth has worked on improving kidney allocation...
...Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted. 
But why stop at three? What about an n-way swap? Let’s add in the possibility of an exchange that raises your spouse on the queue for a cadaveric kidney. And let us also recognize that even if your kidney is compatible with your spouse’s there may be a better match. Is there an allocation system that makes all donors and spouses better off (or at least no worse off) and that maximizes the number of beneficial swaps? In an important paper Alvin Roth and co-authors describe just such a mechanism and show that it could save many lives." 
Who says that theoretical economics isn't applicable to the real world? Game theory is universally applicable. 

Alvin Roth co-runs a blog, Market Design, which I noticed has suddenly gained momentum and audience (judging by the comments on his previous posts). 

As for the predictions, Tyler Cowen missed it this time, but WSJ was spot on by saying that Roth was the favorite to win it.

Congratulations to Alvin Roth and Lloyd Shapley!

Comments

  1. kyle817 October 2012 at 14:26

    I find that subject fascinating and I am looking up some books to read. It goes beyond economics into sociology, and human psychology.

    ReplyDelete
    Replies
    1. Vuk Vukovic17 October 2012 at 20:04

      oh yes, me too, I was always interested in the cooperative part of a game theoretical equilibrium, rather than a non-cooperative part (upon which a Nash equilibrium is based)

      Delete

Post a Comment

Popular posts from this blog

Short-selling explained (case study: movie "Trading Places")

Image
After seeing the movie "Trading Places" (1983), starring Eddie Murphy and Dan Aykroyd, for the thousandth time during the holiday season, I decided to write a quick post explaining what happened at the end of this movie that gets so many people puzzled (including me for the first couple of times I've seen it). This entertaining 80s comedy can actually teach you more about finance and trading than any other Hollywood movie (not counting documentaries), including the infamous "Wall Street" (1987), starring Michael Douglas as the ruthless Gordon Gecko, and especially the latest Scorsese film "The Wolf of Wall Street" (2013). Anyway, we all know the story from Trading Places. Dan Aykroyd plays a snobbish investor Louis Winthorpe ("the Third"), while Eddie Murphy plays a street con artist Billy Ray Valentine whose lives get reversed as a result of a bet between two cruel millionaires, the Duke brothers. The Dukes own a commodities bro
Read more

Economic history: mercantilism and international trade

Image
All too often during poor economic times many debunked economic fallacies of the past get reinvented. The reason is simple: a search for ideas and solutions alternative to the "mainstream" (however we define it) allows those who succumb to these fallacies to repeat the ancient errors classical economics was hoping to get rid of. The short-termism of politics plays a crucial role in the process of persistent perpetuation of such fallacies. This is why in times like these it is essential to go back in economic history and debunk some of the ideas that tend to surface repeatedly. In the following couple of posts, I attempt to do just that.  Misunderstanding trade  One of the most misunderstood areas of economics is international trade. More precisely, the idea that if we were to boost net exports - by subsidizing exports and constraining imports - we can achieve higher GDP growth. If one looks at the simple arithmetic of a standard Keynesian macro model: Y=C+I+G+NX, the
Read more

Rent-seeking explained: Removing barriers to entry in the taxi market

Image
The taxi market is undoubtedly one of the best examples of something economists like to call rent-seeking . What does this phenomenon stand for and why do economists (particularly political economists) devote a lot of attention to it?  The classical definition was given by Gordon Tullock back in his  1967  seminal paper "The welfare cost of tariffs, monopolies and theft" , even though the phrase itself was coined by Anne Krueger in 1974 .  Rent-seeking is a process of gaining private benefits through the political process (by lobbying or logrolling for example). It implies gaining protection for a certain privileged group, which in return promises political support, large campaign contributions, or even bribes. This protection varies from giving a monopoly status to a certain company, regulating market entry than hampers competition (such as introducing licences to specific occupations), imposing tariffs to import goods to protect the domestic industry, handing out su
Read more

Graphs (images) of the week: Separated by a border

Image
Usually comparing countries or regions requires looking at GDP growth data, GDP per capita, living standards, relative income or even the happiness index. But even a simple areal glimpse at the borders separating two systems can be more than enough to conclude which country is richer, healthier, more educated and on average more prosperous. It tells us that the causes of between-country differences have to be more than just climate, geography, culture or mentality. Particularly when the same nation is separated by nothing more than a border depicting the striking differences in political systems of the two countries (a classical example here are East and West Germany, but an equally good example can be North or South Korea).  As a result I found that the following set of images paint a better  picture  on between-country differences   than any existing data on global inequality.  The first one is from a  blog post I encountered on the Why Nations Fail blog, comparing the citi
Read more