Thomas C. Schelling

Game theory, the field of study founded by one of the legendary figures in operations research, John von Neumann, has served as the basis for two Nobel Prizes in recent years, including the 2005 award. Robert J. Aumann of the Center for Rationality, Hebrew University of Jerusalem, Israel, and Thomas C. Schelling, Department of Economics and School of Public Policy, University of Maryland, received this year's Nobel Prize "for having enhanced our understanding of conflict and cooperation through game-theory analysis."

The 2005 Nobel Prize, announced by the Royal Swedish Academy of Sciences in November, was bestowed at ceremonies in Stockholm, Sweden, in December. The two laureates will share the Swedish 10 million kroner that goes along with the Prize.

In 1994, John Nash of Princeton University (and the subject of the blockbuster movie, "A Beautiful Mind") shared the award with fellow game theorists John C. Harsanyi of the University of California-Berkeley and Reinhard Selten of Rheinische Friedrich-Wilhelms-Universitaet in Bonn, Germany.

Game theory is a mathematical theory of human behavior in competitive situations that has become an often-used tool for analyzing real-life conflicts in business, management and international relations. Why do some groups of individuals, organizations and countries succeed in promoting cooperation while others suffer from conflict? According to the Nobel Prize committee, the work of Robert Aumann and Thomas Schelling has established game theory — or interactive decision theory — "as the dominant approach to this age-old question."

Against the backdrop of the nuclear arms race in the late 1950s, Thomas Schelling's book "The Strategy of Conflict" set forth his vision of game theory as a unifying framework for the social sciences. Schelling showed that a party can strengthen its position by overtly worsening its own options, that the capability to retaliate can be more useful than the ability to resist an attack, and that uncertain retaliation is more credible and more efficient than certain retaliation. These insights have proven to be of great relevance for conflict resolution and efforts to avoid war.

Schelling's work prompted new developments in game theory and accelerated its use and application throughout the social sciences. Notably, his analysis of strategic commitments has explained a wide range of phenomena, from the competitive strategies of firms to the delegation of political decision power.

"I'm deeply honored by this recognition," Schelling says. "I've been doing this for over 50 years and it's hard to find a shorthand way to describe my interests. But in my mind it all comes together, and what links this work is my fascination with how people react to and influence others — as individuals and as nations."

Schelling began his career in 1945, working for the U.S. Bureau of the Budget, and later served as an advisor in the Truman administration. He taught for many years at Yale and Harvard and has been honored with membership in the National Academy of Sciences, the Institute of Medicine and as a fellow in the American Academy of Arts and Sciences.

In many real-world situations, cooperation may be easier to sustain in a long-term relationship than in a single encounter. Analyses of short-run games are, thus, often too restrictive. Robert Aumann was the first to conduct a full-fledged formal analysis of so-called infinitely repeated games. His research identified exactly what outcomes can be upheld over time in long-run relations.

The theory of repeated games enhances our understanding of the prerequisites for cooperation: Why it is more difficult when there are many participants, when they interact infrequently, when interaction is likely to be broken off, when the time horizon is short or when others' actions cannot be clearly observed? Insights into these issues help explain economic conflicts such as price wars and trade wars, as well as why some communities are more successful than others in managing common-pool resources. The repeated-games approach clarifies the raison d'être of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements.

A few weeks after winning the Nobel Prize, Professor Aumann was presented the 2005 John von Neumann Theory Prize by INFORMS during the Institute's annual meeting in San Francisco "in recognition of his fundamental contributions to game theory and related areas." (See page 64 for more details.) Among other things in his long, distinguished career, Professor Aumann served as the founding area editor in game theory for the INFORMS journal, Mathematics of Operations Research, and contributed several papers to the publication.

Appearing via videotape, Professor Aumann told the INFORMS audience in San Francisco that he was "very happy and proud to receive the von Neumann Prize and to join all the illustrious people who have won this prize, especially the large number of game theorists. Game theory has played a very large role in the history of the von Neumann Theory Prize, and that's exactly as it should be, because, of course, von Neumann founded this area, and it was his biggest contribution to operations research." — Peter Horner

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