Connecting economics, other social sciences

Game theory uses models to study ways people may interact

October 11, 2005|By LAURA SMITHERMAN AND PAUL ADAMS | LAURA SMITHERMAN AND PAUL ADAMS,SUN REPORTERS

The most widely used exercise in game theory, the field that drew the Nobel Prize in Economic Sciences this year, has nothing to do with economics.

It's called the "prisoner's dilemma" and examines the choices of two criminals to stay mum or confess and implicate their cohort.

The dilemma is a favorite teaching tool of Thomas C. Schelling, a professor at the University of Maryland who won the Nobel yesterday. The prize committee bestowed the honor on Schelling and Israeli-American Robert J. Aumann for their research on game theory.

Game theory uses models to study interactions between nations, companies and people. Economists have long explored incentives and competition in the marketplace, but game theory looks at situations in which two parties have agendas that might or might not coincide.

In the prisoners' situation, if both refuse to talk, they both win because the police have less proof. If one talks, the other one gets a harsher punishment. The dilemma is that neither can make a good decision without knowing what the other will do. Two countries in a trade war could be substituted for the prisoners and their options, or a married couple in an argument.

The rise of game theory marks a shift in the academic world from assuming that people make rational economic choices to understanding more nuanced - and sometimes irrational - human behavior.

Game theory also helped inspire behavioral economics, which has propounded the idea that investors tend to buy high and sell low.

The recent best-selling book Freakonomics explored situations in which economics and behavior collide. And game theory formed the basis for game shows such as The Weakest Link.

The Nobel committee credited Schelling and Aumann with helping to bridge the gap between economics and the other social and behavioral sciences.

Schelling, in particular, used game theory to explore a number of questions, such as why the world hasn't been annihilated by nuclear weapons, how the business of organized crime works and what makes a neighborhood racially segregated. Schelling, 84, has dubbed himself the "errant economist."

"Tom Schelling is the preeminent economist who looked at situations from the mundane, like getting our children to ... bed, to the truly profound, like how we should look at thermonuclear war," said economist Richard Zeckhauser of Harvard University's Kennedy School of Government. "He understood them in terms that were rigorous enough to make economists happy but for the most part comprehensible by the general public."

Game theory evolved from mathematicians trying to understand card and board games in terms of math. Schelling stopped short of putting many of his theories into numerical equations, which led some academics to believe that the Nobel organization snubbed him in 1994 when it awarded the prize to economists including John Nash, the central character in the movie A Beautiful Mind. Nash also used game theory, but his findings were steeped in math.

This year, the prize committee noted that Schelling's "intuition" made it possible for him to proceed without detailed math. Economists today are building mathematical models to explain ideas Schelling came up with decades ago.

"He just had a great way of seeing how the world works," said James Dearden, a professor of economics at Lehigh University.

Zeckhauser, a former colleague of Schelling at Harvard, describes him as a man with many interests, as someone who drives to a stoplight and becomes interested in the collective behavior of drivers who obey the traffic signals and what would happen if the threat of law enforcement wasn't a deterrent.

"You are as likely to encounter him at the top of the mountain as in a seminar room," Zeckhauser said.

Schelling's work gained notice in the 1950s. His seminal book, The Strategy of Conflict, enunciated the notion of mutually assured destruction during the Cold War, which has become a conventional wisdom. Schelling pioneered the concept of brinksmanship, a bedrock of U.S. tactics at the time, in which a country gradually steps up its outrage, thereby keeping the probability of conflict low.

His ideas influenced a generation of military strategists. Secretary of Defense Donald H. Rumsfeld has handed out one of Schelling's writings on Pearl Harbor about the tendency to not seriously consider the improbable.

One of Schelling's breakthrough ideas pointed out that in battle, it can be better to sabotage your position, such as when a commander burns a bridge behind his troops to discourage retreat. He compared it with the game of "chicken," in which two drivers aim toward each other at top speed, with the loser being the one who swerves first. If one of the drivers disconnects his steering wheel and throws it out the window, that driver can no longer avoid an accident. But the opponent knows this, too, and will be forced to back down.

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