Nobel in Economics Is Awarded to Three
For Pioneering Work in Game Theory
By Amanda Bennett
10/12/1994
The Wall Street Journal
Page B3
(Copyright (c) 1994, Dow Jones & Co., Inc.)
Two economists and a mathematician won the Nobel Memorial Prize in Economic Science for their work in game
theory, a field that increasingly has come to influence business strategy.
John C. Nash, who is associated with Princeton University, John C. Harsanyi, a Hungarian-born retired professor of
business and economics at University of California at Berkeley, and Reinhard Selten of the University of Bonn in
Germany will share the $930,000 Nobel prize for developing theories that laid the foundation for what is now a
rapidly growing field.
Game theory is the study of decision-making in competitive situations. It is used in designing markets and auctions
and in predicting the outcome of encounters between competing companies or trading nations. Game theory
analyzes both the conflict and the possible gain from cooperation.
"It has moved us from a zero-sum view of the world to a positive-sum view of the world," said Adam
Brandenburger, an associate professor at Harvard Business School. "One of the boldest things about game theory
was the new view of the marketplace. It's all about creating value."
Even the federal government is using game theory. The Federal Communications Commission recently turned to
game theorists to help design an auction for the next generation of paging services.
Paul Milgrom, an economist at Stanford University who helped design the auction, called it "one of the
breakthroughs in the question of designing markets." He said the auction is an example of how the specific rules
influence bidders' behavior.
In the FCC auction, all 10 licenses were offered simultaneously for bids, rather than sequentially as is usual. During
that auction, held in July, buyers bid a total of $617 million for 10 licenses to offer advanced paging and messaging
services. The auction's results were better than expected.
Mr. Milgrom said game theory has also been used in designing bidding for offshore oil leases, and in looking at new
ways to auction Treasury bills.
Game theory was invented in the 1930s and 1940s by John von Neumann and Oskar Morgenstern, who co-wrote a
book studying imperfect markets. Mr. Nash, the mathematician, developed a key concept of game theory while a
graduate student in the 1950s.
His theory, known as the Nash equilibrium, is now widely taught in introductory economics courses and describes
how and when firms stop bargaining with each other. Based on his work, it is possible to predict the various
strategies players will adopt in certain competitive bargaining situations.
Although Mr. Nash is associated with Princeton, he hasn't actually taught in more than two decades, a situation
colleagues ascribed to his health. At a news conference at Princeton yesterday, he described his choice to leave
teaching as "not exactly a rational decision," adding that his main research these days isn't in economics, but in
physics.
Mr. Harsanyi is noted for his work on how bargaining works when one player has more information than the other.
Mr. Selten expanded and refined the Nash equilibrium theory to include concepts of how strategies develop over
time. Messrs. Harsanyi and Selten, both economists, co-wrote a book on equilibrium in games.
At least partly through the contributions of the three Nobel laureates, businesses began in the 1970s to find practical
applications for game theories.
Today many consultants in business strategy and negotiations base their work at least partly on game theory. David
Kreps, a professor of economics at the Graduate School of Business at Stanford University, says game theory is also
used to study trade negotiations as well as the interactions of employers and employees in firms.
The economics prize was established in 1968 by the Central Bank of Sweden. It is the only Nobel award that wasn't
established by the Swedish inventor of dynamite, Alfred Nobel. The prizes just granted to Messrs. Nash and
Harsanyi bring the number of economics awards to professors associated with U.S. universities to 23 out of the 37
awarded (multiple prizes were awarded in some years.)
In making the award, the Swedish Academy referred to common games of strategy, such as chess and poker, that are
at the root of modern game theory. "Everyone knows that in these games, players have to think ahead and devise a
strategy based on expected countermoves" from the other players, the Associated Press quoted the academy as
saying. "Such strategic interaction also characterizes many economic situations, and game theory has therefore
proved to be very useful in economic analysis."