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Nobel Prize in Economic Sciences 2012: Stable Allocations – from theory to practice.

In October 2012, the Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2012 to Alvin E. Roth, Harvard University, and Lloyd S. Shapley, University of California, Los Angeles. The Royal Swedish Academy of Sciences announced that their accomplishments were from generating an algorithm that can greatly reduce the market inefficiency caused by inefficient decision making processes.

It is very interesting to note that the two awardees are both mathematicians who concentrated their studies on game theory. The algorithm that ultimately brought them the Nobel Prize was also based on game theory. It is not uncommon that a mathematician receives a Nobel Prize in Economic Sciences, because all the economic and financial theories are based on maths and physics.

“I can’t talk to you about the world economy. I don’t know anything about the world economy!” Alvin Roth said to a journalist on the phone as he stepped off the treadmill in his office in the Landau Economics Building. The algorithm composed by Roth was creative. His field of study is based on microeconomics. He specifically studied matching algorithms.

The algorithm ensures 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.

http://www.nobelprize.org/nobel_prizes/economics/laureates/2012/press.html

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