Archive for the ‘Nobel’ Category

Lloyd Shapley and Ehud Kalai, 2008, left panel; Alvin Roth, 2010, right panel

Left: Lloyd Shapley (left) and Ehud Kalai, ca. 2004 (Photo courtesy of Ehud Kalai). Right: Alvin Roth during the 2010 Nancy L. Schwartz Memorial Lecture (Photo © Nathan Mandell).

Lloyd Shapley and Alvin Roth were awarded the 2012 Nobel Prize in Economics this week. Even though the Kellogg/NU poll did not predict this year’s winners, in the time since the announcement, many faculty have agreed that this is a well deserved award. The prize was for Shapley’s and Roth’s work on “the theory of stable allocations and the practice of market design.”

Lloyd Shapley is considered one of the founders of game theory, in particular cooperative game theory. “His work is amazing,” said Professor Ehud Kalai, founding editor of Games and Economic Behavior and co-founder of the Game Theory Society. “Almost everything we do is influenced by the work of Shapley, Nash and Aumann.” In Kalai’s view, Shapley created several important areas of research, spanning from Shapley value, to the notion of the core of a game, oceanic games (large games with an ocean of players), stochastic games and matching, among others.

According to Professor Robert Weber, who is a co-author of Shapley:

Lloyd Shapley is a beautiful person.

He led the development of game theory, both in its mathematical underpinnings, and as a broad field of economic relevance. Most of the key results in its early years benefited from his insights. His work is elegant, and is a delight to read.

As well, he has always been gracious with his time, sharing his intensity and interests both with senior colleagues and with students as they first step into the area. I treasure the time I’ve spent with him over the past 40+ years.

Among the work by Shapley cited by the Nobel Prize committee is his research on matching students to colleges with the late David Gale in 1962 (“College Admissions and the Stability of Marriage“). The resulting Gale-Shapley algorithm was a formalization of a mechanism to match elements of two groups (students and colleges, firms and workers, etc), considering their preferences in such a way that the match is “stable” in the sense that there is no alternative matching that would make one of the matched pairs better off.

Professor Thomas Hubbard, currently Senior Associate Dean for Strategic Initiatives, was a colleague of Lloyd Shapley at UCLA during the mid 1990s. He highlighted another aspect of Shapley’s contributions, the notion of Shapley value in coalition formation. Power in a negotiation depends not just on the best alternative to a negotiated agreement but also on how much value a party contributes to the various coalitions it might form with others. The idea of Shapley value is also used in strategy classes, albeit dubbed ‘added value’ in MBA teaching (following the book by Adam Brandenburger and Barry Nalebuff, Co-opetition).

Alvin Roth is credited with having realized the value of Shapley’s work in a number of applications. In joint work with Kellogg School’s Professor Keith Murnighan, he started testing the axioms of bargaining theory in the lab. Their collaboration, which dates back to the late 1970s, led to a dozen of published papers and was discussed in a 2006 chapter. In a blog entry on Monday, Murnighan said:

I always claimed that I taught Al how to do an experiment. Truth be told, I didn’t have to tell him much. After we had worked together for a while, I often told him that someday he would do an experiment on his own; he always replied by saying that someday I would prove a theorem on my own. We both actually did that.

In experimental and theory work, Roth and his co-authors extended and applied matching theory to a variety of settings, including kidney exchanges, residency assignments of newly minted doctors in the US, as well as school admissions. His work led to practical applications of game theory in the National Residency Matching Program (which implemented a matching algorithm designed by Roth in 1997), in the New York City public high schools and the Boston Public School system, which use a version of the deferred-acceptance model algorithm. Finally, Roth and co-authors Tayfun Sönmez and Utku Ünver founded the New England Program for Kidney Exchange with doctors Frank Delmonico and Susan Saidman. In his Nancy L. Schwartz Memorial Lecture in May of 2010, Roth discussed kidney exchanges in detail. He was the 28th speaker in this annual lecture series and the 13th Nobel laureate (9 of whom went on to win the Nobel after giving the lecture).

The last time Lloyd Shapley gave a lecture at the Kellogg School, was during the Third World Congress of the Game Theory Society, in July of 2008. At that conference, Tim Roughgarden gave the first Shapley Lecture, a newly established lecture series.

For more information, see the blog entries by professors Jeff Ely in Cheap Talk and Rakesh Vohra in The Leisure on the Theory Class. Al Roth blogs at Market Design.

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Nobel Prize season is upon us. For the fourth year, we polled faculty members in the Kellogg School of Management as well as the Economics Department in the Weinberg College of Arts & Sciences at Northwestern University about their predictions for this year’s Nobel Prize in Economics. In over a week of voting, 42 faculty members responded with far-ranging predictions: 39 different prospective Nobel candidates were selected.

Two names top the list this year – Oliver Hart and Jean Tirole, each with 7 votes.  Jean Tirole has a been a long standing favorite of our faculty, included among the top three names each year we have run the survey.  He is a faculty member at the Toulouse School of Economics and has published widely in the areas of industrial organization, finance, corporate governance, and contract theory.  Oliver Hart, a professor in Harvard University, is widely known for his work in contract theory, theory of the firm, and law and economics.  Hart and Tirole were the only names that garnered votes across four academic departments (out of seven), which might be interpreted as an indication of how influential their body of work has been across fields.

Click on the chart to see a larger version.

On many occasions, the Nobel prize has been awarded to more than one scholar. One duo that surfaced in the survey was that of Bengt Holmström and Jean Tirole.  Both have co-authored a number of influential papers on financial intermediation, theory of the firm, and liquidity.

Attempting  to further read the tea leaves provided by the survey would indicate that there is some expectation that mechanism design deserves another prize (the previous one was bestowed in 2007), with scholars such Robert Wilson, Paul Milgrom and Alvin Roth making it onto our list.

In 2009, many were surprised that a non-economist (the late Elinor Ostrom) was among the Nobel winners that year. Could 2012 bring another surprise? One faculty member thought Mark Granovetter, an economic sociologist noted for his work on social networks and embeddedness, might be this year’s Nobel dark horse.

The Nobel Prize in Economics will be announced on Monday, October 15 at 6:00AM CDT. Set your alarms!

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Catherine Rampell, writing Ostrom’s obituary for the New York Times:

Professor Ostrom’s work rebutted fundamental economic beliefs. But to say she was a dark horse for the 2009 economics Nobel is an understatement. Not because she was a woman — although women in the field are still rare — but because she was trained in political science.

Professor Ostrom’s prizewinning work examined how people collaborate and organize themselves to manage common resources like forests or fisheries, even when governments are not involved. The research overturned the conventional wisdom about the need for government regulation of public resources.

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Sargent and Sims, the 2011 Nobel Prize in Economics laureates

Thomas Sargent and Christopher Sims were awarded the 2011 Nobel Prize in Economics this morning. Though both slipped under the radar of the Kellogg School/NU poll, no one is surprised that the pair are sharing this year’s prize.

“Everyone has been expecting that they would be getting the prize,” Larry Christiano, a professor of economics, told me. “It’s not surprising that they finally did get it. If anything, it’s a little bit late.”

“Sims and Sargent have been central to the development of much of modern day macroeconomics,” said Arvind Krishnamurthy, a professor of finance. “Almost all of macro research carried out today owes to ideas from their work.”

“In macroeconomics we cannot run experiments, so we have to try to figure out cause and effect from the data that we have available,” said Sergio Rebelo, a professor of finance. “Both Sargent and Sims contributed tools that are useful to undertake this difficult task.”

Sargent’s and Sims’s work is related but complementary to each other, as is often the case with Nobel awards in economics. Sargent was one of the proponents of the rational expectations revolution that started back int he 1970s. The notion of rational actors is fundamental to most macroeconomic and game theoretic models these days. Sims’s developed statistical tools in the 1980s which he claimed at the time would be incredibly useful in analyzing macroeconomic conditions. “He was abundantly right about that,” said Christiano, who was was advised by Sargent during his PhD.

The techniques Sargent and Sims developed are used extensively in both academic and policy discussions, said Giorgio Primiceri, an associate professor of economics. “They are essentially the fathers of modern macroeconometrics.”

Though the Nobel committee cited work that done decades ago, both Sargent and Sims remain influential in current scholarly debates. “Both continue to be really important figures in macroeconomics now,” Christiano said. Sims’s new research has focused on government spending, monetary policy, and how the two interact as well as a notion called rational inattention. Rational inattention is the idea that economic actors cannot process all available information when making a decision and must make a choice of which information to use.

“His contributions go far beyond his research,” said Jonathan Parker, a professor of finance and former colleague of Sims. “A Nobel prize could not be given to a nicer person. In academe, where time is short and egos can get tangled up in research, Chris took time with people, kept debates about the facts not the personalities, and enjoyed advising students.”

Like Sims, Sargent continues to push the boundaries of research. “I would be hard pressed to name an area of macroeconomics where a Sargent paper is not one of the key contributions,” Parker said. And rather than defend his old work on rational expectations, Christiano said, Sargent continues to challenge the way economists think about expectations in economic models. “Sargent is running a little counter revolution to his rational expectation revolution.”

Both laureates are “still working on path-breaking stuff today,” Christiano said.

“I cannot think of anyone in applied macroeconomics that deserves the prize more than Sargent and Sims,” Primiceri said. “They are both great role models for the younger generation of macroeconomists,” Rebelo added.

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Nobel Prize medal

Update: The prize has been announced. Read reactions from Kellogg School and Northwestern University economics faculty.

The 2011 Nobel Prize in Economics will be announced Monday, and this year also marks the third anniversary of the Kellogg School of Management/ Northwestern University poll. I asked faculty from the Kellogg School and Northwestern University’s economics department to select their favorites for the prestigious prize. Sixty people responded this year.

Jean Tirole—a darling of this poll in previous years—again jumped to the front of the pack. Tirole is a professor at the Industrial Economic Institute in Toulouse, France, where his work focuses on game theory and industrial organization. He has also written books on financial regulation and financial crises, which may be part of the reason he continues to rise to the top in this poll.

Kellogg School/NU 2011 Nobel poll, votes for individuals

Paul Romer, who finished in the top five in last year’s Kellogg School/Northwestern University poll, came in second this time around. Romer is a senior fellow at the Stanford Institute for Economic Policy Research, and his research centers on how technological change affects economies, specifically shifts in worker productivity. Considering how steadily productivity has risen in past decades, he seems a fitting choice.

One respondent voiced their support for Romer: “I think for another year the committee will avoid anything overtly political, or anything that celebrates unrestrained financial markets. Economic growth is my forecast for this year. It is one of the topics for the moment. So Romer is a natural. Who will be paired with him? Harder to call.”

Kellogg School/NU 2011 Nobel poll, respondents by department

Douglas W. Diamond, a professor at the University of Chicago, rounds out the top three. Diamond co-developed a model with Philip H. Dybvig which simulates bank runs in financial crises. Last year, associate professor of finance Josh Rauh had this to say about Diamond: “While Diamond first developed these theories in the 1980s, the recent financial crisis shows that they are completely applicable even in the more complex financial system that has evolved. In the 2008 crisis, the repo market played served the same function as the deposits, and the mortgage-backed securities were the long-term assets on bank balance sheets.”

Diamond and fourth-place finisher Jerry A. Hausman are the only predictions on the Thompson-Reuters list that fared well in the 2011 Kellogg School/Northwestern University poll.

Kellogg School/NU 2011 Nobel poll, votes by department

More generally, the three professors expected the Nobel to be awarded to someone specializing in econometrics. Other predictions included game theory, development, contract economics, financial economics, and marketing. On that last one, one respondent commented, “Economists neglect such forces as advertising, sales force, sales promotion and other tools in affecting shifts in demand and supply. Their model of buyer behavior is primitive (rational man) at a time when behavioral economics is coming into vogue.”

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2010 Nobel Laureates in economics

Dale Mortensen, Peter Diamond, and Christopher Pissarides won the 2010 Nobel Memorial Prize in Economics for “their analysis of markets with search frictions,” the Royal Swedish Academy of Sciences announced today. Mortensen is a professor of economics at Northwestern University, Diamond is a professor of economics at MIT, and Pissarides is a professor of economics at the London School of Economics.

This year’s prize directly addresses jobs searches and unemployment, a problem that continues to plague economies across the world. Why people remain unemployed when there are job openings was something that long bothered economists. In theory, open positions and people seeking jobs should not occur simultaneously—if there is one open position and one person looking for a job, the two should find each other, ending that person’s unemployment and filling the position. In reality, matching job seekers with the correct positions is a difficult task, something many people know all too well. Known as search frictions, these difficulties in the labor market are typically related to geography and the task of searching for a job.

Diamond’s early work in the field examined other searches, said Robert Porter, a professor of economics at Northwestern. Search models were largely under-researched before Diamond published his widely-cited paper on the topic in 1982. “Diamond starts us really thinking about search models,” said Jeroen Swinkels, a professor of management and strategy at the Kellogg School. Before Diamond’s paper, economists had only been able to convincingly model a world where search didn’t exist— in that world, consumers magically know an item’s price at every store, for example. Search models allowed economists to view the world as it actually is—consumers must search different stores to find the best price, a task that is consuming.

It wasn’t until 1994 that Mortensen and Pissarides successfully extended Diamond’s model unemployment. “If you apply [Diamond’s model] to labor markets, which is what the Mortensen-Pissarides paper does, then you suddenly have a world in which you can simultaneously have unemployed people and empty jobs.”

“There were attempts” at mathematically describing simultaneous hiring, firing, and unemployment before Mortensen and Pissarides’ paper, “but this one made a big difference,” Swinkels said. Mortensen’s work also shed light on another economic riddle, the issue of wage dispersion, or why two seemingly equal workers may be compensated differently.

Mortensen is currently a visiting professor at Aarhus University in Denmark where he is continuing his work on labor market search frictions.  Denmark keeps remarkably detailed data on its labor market, which Mortensen is using to study how his ideas apply at different scales in the economy.

As unemployment continues to dog economies across the globe, many economists are concerned that some of the frictions the Nobel laureates described have worsened in recent years. For example, many economists think the U.S. housing market is weighing down the nation’s labor market. American’s have been extraordinarily mobile in the past few decades when taking new jobs, something that has eased unemployment in the past. Now as people’s homes have lost value, they are more hesitant to sell their properties to relocate for a new job.

This year’s Kellogg School/Northwestern poll was remarkably prescient. Dale Mortensen was the faculty’s top pick, and Peter Diamond was the third favorite. Sandeep Baliga, a professor of managerial economics and decision sciences at the Kellogg School, predicted all three winners perfectly in a post on his blog. “The award was well deserved,” Jonathan Parker, a professor of finance at the Kellogg School, said of Mortensen’s win.  “We’re still working out all the far reaching implications of his ideas.”

“It was richly deserved,” said Arvind Krishnamurthy, also a professor of finance at the Kellogg School. “It was only a matter of time before he got it.”

The Nobel Prize committee has posted a PDF detailing the science behind this year’s prize.

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If you’re looking for the results of the 2011 Kellogg School/Northwestern University poll, head over to this year’s post.

Nobel Prize medal

Update: The winners have been announced! Check out the new post for details on the new laureates and their research.

It’s Nobel Prize season again!

The Nobel Prize in Economics is the last of the famed prizes to be announced, and the predictions for this year are as wide-ranging as ever. I polled the faculty of the Kellogg School of Management and the Department of Economics at Northwestern University for their predictions of who will win the 2010 award. Fifty-three people responded.


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