Monday, October 10, 2005

Schelling and Aumann - Nobel laureates

The Nobel laureates for 2005 in Economics are Thomas Schelling and Robert Aumann for their work in game theory, which is basically the theory of strategic interactions between individuals or groups. Marginal Revolution has a good summary of the work of both Schelling and Aumann on their blog. I am not familiar with Aumann's work, but just last week, we discussed some of Schelling's racial segregation work in my graduate Urban Economics course.

The most interesting aspects of Schelling's work in my opinion:
1. His analysis of how people racially segregate into neighborhoods. He starts from a fairly realistic assumption that most people do not want to be a significant minority in their neighborhood. From that innocent assumption, he shows that people will start to move to neighborhoods where they are a majority, and you end up with neighborhoods that are totally segregated even when most people do not prefer a totally segregated neighborhood.

2.He also did very interesting work on using game theory to explain the nuclear conflict of the Cold War in his book The Strategy of Conflict. Schelling showed that countries can make their bargaining position better by giving themselves less options (giving yourself less options make your likelihood of retaliation greater). He also showed that uncertain retaliation is more credible in nuclear war than guaranteed retaliation (why would you retaliate after you have already been destroyed?). As pointed out by Marginal Revolution, you can see pretty good illustrations of his ideas in the movie Dr. Strangelove.

No questions here, just illustrating more interesting, non-mainstream applications of the field of economics...


Rebecca said...

One of Schelling's ideas that I found interesting was "focal points"; he notes that people coordinate through common experiences or common ideas of what is important. One example in the article is that if a meeting time for lunch is not specified, people will usually assume that the meeting time is noon. At Walker, an example of a focal point might be if you hear an announcement for an assembly but do not hear where it is, you will automatically assume that it is in the auditorium.

I also thought it was funny that the author of the article describes Schelling as someone who "looks as if he sells Hush Puppies at the local mall." What does a Hush Puppy salesman look like?

here's a website with his picture: not very hush-puppy-like to me.

--Rebecca Merrick

DANIEL said...

Aumann's point about agreeing to disagree seems rational. If two people are actually "rational truth-seekers", then they should be able to come to a common conclusion. However, I think the reason for the common occurance of two people not reaching a similar opinion is that we are not rational truth seekers. Although we know that our opinion may not be entirely true, we tend to hold to this false truth out of pride of our own intelligence. We often have trouble accepting the opinions of others, no matter how rational their opinions may be.
---Daniel Ballard

Anonymous said...

Thomas Shelling makes a controversial point with the economics of segregation. As already noted, Shelling shows how people choose to live in a neighborhood in relation to the wealth of the area so they are not a minority. Even though this brings up difficult topics of social class and race, doesn't it make sense that people buy houses in which they can afford? If a family has a higher income, more than likely they will prefer a more expensive house. If a family has a lower income, they might want to live in a lower quality enviornment.

Unfortunately, the economics of segregations separates people in relation to the size of their income. Honestly, I don't think someone wants to be dirt poor in a rich neighborhood, or filthy rich in the ghetto.

Because of this rationale, the economics of segregation is justified in its reasoning.

---Paul Moustoukas