Tag Archives: research

Roth and Shapley Win 2012 Economics Nobel

Alvin E. Roth (Harvard University, Cambridge, MA, USA, and Harvard Business School, Boston) and Lloyd S. Shapley (University of California, Los Angeles) won the 2012 Nobel Prize in Economic Sciences for their work related to cooperative game theory.

From the Nobel Prize website:

Lloyd Shapley used so-called cooperative game theory to study and compare different matching methods. A key issue is to ensure that a matching is stable in the sense that two agents cannot be found who would prefer each other over their current counterparts. Shapley and his colleagues derived specific methods – in particular, the so-called Gale-Shapley algorithm – that always ensure a stable matching. These methods also limit agents’ motives for manipulating the matching process. Shapley was able to show how the specific design of a method may systematically benefit one or the other side of the market.

Alvin Roth recognized that Shapley’s theoretical results could clarify the functioning of important markets in practice. In a series of empirical studies, Roth and his colleagues demonstrated that stability is the key to understanding the success of particular market institutions. Roth was later able to substantiate this conclusion in systematic laboratory experiments. He also helped redesign existing institutions for matching new doctors with hospitals, students with schools, and organ donors with patients. These reforms are all based on the Gale-Shapley algorithm, along with modifications that take into account specific circumstances and ethical restrictions, such as the preclusion of side payments.

Even though these two researchers worked independently of one another, the combination of Shapley’s basic theory and Roth’s empirical investigations, experiments and practical design has generated a flourishing field of research and improved the performance of many markets. This year’s prize is awarded for an outstanding example of economic engineering.

You Can’t Always Like What You Want: Recent Neuroscience Research and Economics

Desire isn’t what it used to be.

Recent research [*]  has found that the neural circuits related to “wanting” are different from those for “liking”. In other words, the regions, processes, and pathways in our brains involved with wanting things are not the same of those related to actually enjoying them.

This potentially has big implications in economics. Much economic theory is predicated on the idea that people most want what they will most enjoy. If humans err when choosing what to buy — if they consistently desire things that they won’t actually like — that would undermine this basic economic premise.

We already know of many instances where humans – or at least many humans – make consistently biased  decisions. People tend save too little for the future and later regret it. People tend to charge much more than they can afford to on credit cards, causing them long-term financial and personal problems. People with various forms of addiction cannot help themselves from gambling, or consuming dangerous drugs and alcohol.

In fact, the list of situations and circumstances in which humans intentionally take actions that will make themselves worse off is long and growing. It’s to the point where it’s hard to defend the assumption that people normally act rationally.

In other words, it’s getting easier to argue that individuals’ well-being often could be improved through the right type of government involvement in certain markets.

We’ve know this for some time, of course. The U.S. started the Social Security program in 1935. This wasn’t based on some grand theory of human economic behavior; they simply wanted older Americans to have enough to live on. Since then research in behavioral economics and psychology has found that humans tend to not save enough for the future. We’ve even identified neural circuits that are responsible for this failure. Research has justified the need for Social Security.

And we continue to find more situations where humans don’t act as rationally as economists might like.

None of this can justify unlimited government interference in the economy, of course. This isn’t a blank check for the well-intended policy. Government involvement in any market always has a cost in terms of efficiency, and invariably has unintended and unanticipated effects.

But the more we learn about human behavior and the human brain, the clearer it is that humans are not the perfectly rational and sensible beings that economists once believed they were. And the more it opens up the potential that the right type of government incentives and policies in the right areas could make people better off than they would otherwise be.

[*]  Kringlebach and Berridge, “The Joyful Mind” in Scientific American, August 2012. Click here to view graphic from article.