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Unformatted text preview: 1 (4) The Prize in Economic Sciences 2005 • The Royal Swedish Academy of Sciences • www.kva.se The Prize in Economic Sciences 2005 s u p p l e m e n ta r y i n f o r m at i o n t o p r e s s r e l e a s e 1 0 o c t 2 0 0 5 Robert Aumann and Thomas Schelling have contributed to enhancing our understanding of conﬂict and cooperation. They have achieved this by extending and applying game theory – a method used to analyze strategic interaction among different agents. Their work has transformed the social sci- ences far beyond the boundaries of economics. Aumann’s and Schelling’s research continues to shape the debate on the formation of social institutions. Conflict and cooperation through the lens of game theory In human interaction, a single individual can seldom determine what will happen; everyone can to some extent affect the outcome. For example, if someone in a two-party relation can choose between two alternative courses of action and the other party has three options, there are a total of 2 x 3 = 6 possible outcomes. The two parties usually have different evaluations of these outcomes and act on the basis of which alternative they think the other party will choose. Many interactions involve several steps over time and it is not unusual for them to be associated with asymmetric information, i.e., some parties know something which others do not. The analysis of strategic interaction – of all kinds – is the essence of game theory. The term itself brings to mind games in everyday life. But, as this year’s Laureates have shown, the most important applications of game theory are to be found in such vital issues as secu- rity and disarmament policies, price formation on markets, as well as economic and political negotiations. Negotiations in the Shadow of the Cold War In the mid-1950s, Thomas Schelling began to apply game-theory methods to one of the era’s most vital issues – global security and the arms race. As Schelling himself noted, considerable progress can be achieved simply by drawing a diagram which describes the alternatives avai- lable to the opponent and to one’s own country, followed by systematic consideration of the outcome in the different cases. Such a process also serves as a reminder that the other party in a conﬂict faces a similar decision-making problem. Schelling was particularly intrigued by the ways in which the parties’ negotiating strength could be affected by different factors, such as the initial alternatives at their disposal and their potential to inﬂuence their own and each others’ alternatives during the process. He clari¡ed why it could be advantageous to limit one’s own alternatives or worsen one’s own options – literally to burn one’s bridges. He was also interested in the process of establishing a climate of con¡dence, whereby long-term cooperation could be built up over a period of time, and in the long-run gains a party could achieve by making short-run concessions. The results and in the long-run gains a party could achieve by making short-run concessions....
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- Spring '10
- Game Theory, ........., Thomas Schelling