The Afternoon Report: The Economics of Truth
Three American economists won the Nobel Prize for work that centers on how mechanisms such as markets and auctions can get people to admit how much something is worth to them.</br></br>Americans Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson were awarded the Nobel prize in economics Monday for their study of "mechanism design." An abstract branch of economics that employs daunting formulas and heroic feats of mathematics, mechanism design is decidedly clear-eyed in its approach understanding always-less-than- perfect circumstances of economic exchanges. One way to understand the "mechanisms" these distinguished dismal scientists study is to think about an auction for, say, a Picasso painting. It's a pretty efficient way of getting people to admit -- by bidding -- how much they value the painting. And according to Tyler Cowen, a professor of economics at George Mason University and well-known economics blogger, essentially, these economists use math to analyze and describe that process of "trying to get people to tell the truth or reveal information." Jeffrey Ely, an economics professor at Northwestern University who works in the field, explains mechanism design as a sort of reverse engineering of game theory, a field in which people try to understand how individual incentives and structural rules interact and result in certain behaviors. But instead of just understanding the rules of existing systems, mechanism design focuses on designing them in such as way that a certain outcome is achieved. "They developed the basic tools for thinking about institutions in this way," Mr. Ely said of today's award winners.</br></br>Alvin Roth is a professor of economics at Harvard University who has used some of the theories pioneered by today's Nobel award winners to help design programs such as the process by which medical students are placed in residency programs at hospitals. "You might say that before modern game theory, economists looked at markets and other economic institutions sort of the way botanists look at plants, as naturally occurring mysteries to be studied," Mr. Roth wrote in an email. "Mechanism design takes seriously that markets are built by people, and starts to ask what we can do with them, what we can't, and how best to go about it." As such, their work has applications in a wide range of fields, from regulatory policies such as the Federal Communications Commission's somewhat abstract auctions of bandwidth on the wireless spectrum, to the residency-placement system devised Mr. Roth, to the kidney-donation swaps highlighted in today's Wall Street Journal. And, more generally, the economists' theories can be used as a framework to help identify when markets, auctions or other mechanisms -- such as matching programs -- might be better -- or ill -- suited for providing a specific outcome.</br></br>At 90 years old, Mr. Hurwicz is the oldest Nobel winner ever, according to the academy. Mr. Maskin, 56 years old, is professor at the Institute for Advanced Study at Princeton, N.J.; and Mr. Myerson, 56, is a professor at the University of Chicago. The award is officially known as the Nobel Memorial Prize in Economic Sciences. It isn't one of the original Nobel Prizes, but was created in 1968 by the Swedish central bank in Alfred Nobel's memory. Nobel Prize winners receive $1.5 million, a gold medal and a diploma from the Swedish king on Dec. 10, the anniversary of Nobel's death in 1896.</br></br>---