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Two Americans, German Win Nobel in Economics : Prize: Berkeley professor among honorees for game theory. Idea links decision-making from poker to pricing.

October 12, 1994|JONATHAN PETERSON | TIMES STAFF WRITER

Three economists, two Americans and a German colleague, were awarded the Nobel Prize Tuesday for their work on a theory that explores human behavior in settings ranging from a poker game to the corporate suite in an increasingly global marketplace.

The winners--John C. Harsanyi of UC Berkeley, John F. Nash of Princeton University and Reinhard Selten of the University of Bonn--are scholars of game theory, which applies complex logic to real-world scenarios of conflict and competition. These include military strategy, politics and sports in addition to a broad range of business problems.

"Eventually it will give us a higher standard of living because we make better decisions," Harsanyi, 74, said from his home in Berkeley, because the theory can lead to "better economic decisions by business and government."

Across the Atlantic Ocean, Harsanyi's former collaborator, Selten, 64, was almost apologetic about the esoteric nature of his specialty. "I have worked a long time in the field of mathematical economic theory, and everything to do with mathematics is difficult to understand for many," he told reporters.

A key to the theory is the notion that if you can understand the strategies of all your rivals, you gain insight into the outcome of a situation and the potential benefits, economists said Tuesday.

Unlike textbook economics, which is often divorced from the real world, game theory assumes that people get tangled up in knotty, interactive situations that may be filled with bluffs, second-guessing and bold gambles. Complex scenarios are typically spewed out of a computer in the language of mathematics.

In citing the winners, the Royal Swedish Academy said the three had employed strategies observed in games like chess and poker to make predictions about the interaction between companies.

"Everyone knows that in these games, players have to think ahead--devise a strategy based on expected countermoves from the other player(s)," the judges said.

At a Princeton University press conference, Nash joked that he wished the $930,000 prize were bigger because it had to be divided three ways. But Nash, 66, said he was "thrilled to receive this high honor."

In the 1940s, military analysts used early game theory as a tool to help guide U.S. ships in the perilous journey across the Atlantic Ocean. Later it was incorporated into Cold War thinking, such as in U.S. nuclear strategy against the Soviets.

But scholars have always appreciated the economic implications, which seem well suited to a world of far-flung corporations and fierce economic competition.

Increasingly since the 1970s, business strategists have built upon the theoretical foundations of game theory to tackle issues involving pricing, bidding for contracts and other strategies.

Airlines use it during price wars to calculate their rivals' plans and determine which course of action will prove most profitable. Companies may use it in making decisions about a new product, to boost their advantage over the competition.

The impending government auction for airwaves to be used by new telecommunications equipment provides a case in point. Prospective buyers for the coveted space on the radio spectrum are trying to figure out how much to bid for which portions of the spectrum and in what regions of the country.

"Every serious bidder in the auction is hiring a game theorist to help them figure out their strategy," said Carl Shapiro, a professor of business strategy at UC Berkeley.

Game theory also is transforming the way many people think about the economy.

Textbook economic theory "is about an isolated Robinson Crusoe-like individual coping with scarcity," observed Samuel Bowles, an economics professor at the University of Massachusetts. Game theory, by contrast, "is always about two or more people, and they are coping strategically with their interdependence."

It is a "very appropriate theory in the late 20th Century, in which the world of (individual) lemonade-stand capitalism increasingly is a textbook illusion."

The Swedish academy Tuesday singled out Princeton's Nash for refining the "Nash Equilibrium," a formula for understanding how people compete in situations where they have knowledge about each other's positions.

"The Nash Equilibrium has become a standard tool in almost all areas of economic theory in order to improve our understanding of complex strategic interaction," the academy said.

Selten, who co-authored a book with Harsanyi, built upon Nash's work and applied it to certain forms of economic competition, such as when there are only a few sellers of a particular product.

Harsanyi helped pave the way for the emerging field of the economics of information through his research into how games of incomplete information can be analyzed.

"I was woken up by the telephone at 4:45 in the morning--and I thought either a friend had a bad accident or they were calling to tell me about the Nobel Prize. Luckily it was the Nobel," said Harsanyi, a Berkeley professor emeritus.

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