Game theory economists share Nobel prize

updated 2:49 p.m. ET Oct. 10, 2005

STOCKHOLM, Sweden - A pair of game theorists who defined chess-like strategies in politics and business that can be applied to arms races, price wars and actual warfare won the Nobel Prize in Economic Sciences on Monday.

Israeli-American Robert J. Aumann and U.S. citizen Thomas C. Schelling won the award for research on game theory, a branch of applied mathematics that uses models to study interactions between countries, businesses or people.

The theory, devised in 1944 by John von Neumann and Oskar Morgenstern, is often used in a political or military context to explain conflicts between countries. More recently it has been  used to map trends in the business world, ranging from how cartels set prices to how companies can better sell their goods and services in new markets.

“The understanding of game theory helps explain economic conflicts like price competition and trade wars,” said Jorgen Weibull, chairman of the prize committee. “I think the main impact is on economics, but it also applies to other social sciences.”

Aumann, 75, and Schelling, 84, who know each other but have never worked together, were cited by the Royal Swedish Academy of Sciences for helping explain “economic conflicts such as price wars and trade wars, as well as why some communities are more successful than others in managing common-pool resources.”

It said the pair’s work, which built on research by the 1994 winners of the same prize, could be applied to understand how merchant guilds, international trade treaties and even organized crime groups are formed and operate.

Schelling, who teaches at the University of Maryland, used game theory in his 1960 book “The Strategy of Conflict” to focus on how the U.S. and the former Soviet Union maintained credible threats that were not likely to be used, given the threat of nuclear annihilation.

“If you have second-strike capacity, then it makes your opponent think twice,” said Carl-Gustaf Lofgren, a member of the prize committee.

In an interview with The Associated Press, Schelling said: “I use game theory to help myself understand conflict situations and opportunities.”

He said the prize committee linked the two laureates on the virtue of their respective research.

“They linked us together because he is a producer of game theory and I am a user of game theory,” said Schelling, who worked with the U.S. Marshall plan to rebuild Europe after World War II.

At a news conference in Jerusalem, Aumann had few words of comfort for compatriots wondering when their decades-old fight with the Palestinians would end, although he said he hoped his work could help.

“It’s been going on for at least 80 years and as far as I can see it is going to go on for at least another 80 years. I don’t see any end to this one, I’m sorry to say,” Robert Aumann told reporters when asked about prospects of achieving peace.

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