Tuesday, October 16, 2007

Rock, Paper, Scissors? Game theory work on market mechanisms wins Nobel Prize for Economics


A few years ago, the head of a Japanese corporation consulted both Sotheby's and Christie's for their advice on selling his company's corporate art collection of important Impressionist paintings and other masterpieces.

The sales pitches offered by the heads of the two auction houses were so close that the Japanese mogul couldn't decide who to give the instructions to. So he hit upon a novel solution. He invited the two men back to his office where they were expected to engage in the children's game of Rock, Paper, Scissors. The winner would get the business.

Rumour has it that prior to the big match the Sotheby's representative consulted his two daughters who were regular players of the game at their prestigious private school in upstate New York. After receiving his daughters' wise words on playground probability theory, Dad promptly flew back to Japan and won the game, thereby securing the contract to sell the corporate art collection.

I suspect this isn't, strictly speaking, an example of 'game theory' as it is understood by economic scientists. But as an equitable solution to a difficult commercial dilemma it's hard to beat.

Thus it came as no surprise to hear that this year's Nobel Memorial Prize in Economic Sciences has been awarded to three U.S. academics — Leonid Hurwicz (aged 90, right), Eric S. Maskin and Roger B. Myerson (both 56) — for their work on game theory in markets, or more specifically on how people's knowledge and self-interest can affect their behaviour in market situations. The idea that knowledge and self-interest play a crucial role in markets seems pretty bloody obvious to me, but hey, what do I know?

The full story (here) refers to, among other things, how this Nobel Prize-winning work touches on auctions. For example, Eric S. Maskin has conducted research to determine which auction mechanisms bring most revenue to sellers.

Funny, isn't it, how economists spend their lives meditating on these issues, eventually winning the Nobel Prize, while Pierre Omidyar pops out of nowhere to invent eBay, at a stroke revolutionising the auction universe. I guess that's why the three Nobel Prize winners get to share $1.5 million, while Omidyar is said to be worth $8.8 billion.

Meanwhile the art market is still governed by the traditional gavel and rostrum auction procedure which remains open to all manner of sharp practices (hence the furious letters to Antiques Trade Gazette every week). Perhaps this partly explains why the art market is still exploding like a stick of Nobel dynamite.

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