Oct. 15 (Bloomberg) -- Alvin E. Roth and Lloyd S. Shapley shared the 2012 Nobel Prize in Economic Sciences for their work on matching supply and demand for everything from single men and women to organ donors and their recipients.
“The combination of Shapley’s basic theory and Roth’s empirical investigations, experiments and practical design has generated a flourishing field of research and improved the performance of many markets,” the Royal Swedish Academy of Sciences, which selects the winner, said in a statement in Stockholm today. “This year’s prize is awarded for an outstanding example of economic engineering.”
Shapley, 89, designed theoretical constructs and algorithms to study and compare different matching methods. Roth, 60, built on his work, using experimental economics and market design to solve real-world problems, including matching 20,000 doctors annually with U.S. hospitals during their first year of employment and 90,000 teens with New York City high schools.
Roth, who has been a professor of economics and business administration at Harvard in Cambridge, Massachusetts, since 1998, is leaving the school at the end of the year for a new position at Stanford University, where he is currently a visiting professor of economics. Shapley is Professor Emeritus at the University of California, Los Angeles.
“I was sleeping when I got the call,” Roth said by phone to reporters gathered in Stockholm. “My students will pay more attention now. It was expected that Shapley would win; it would have been a great oversight if he hadn’t. I am very honored to share it with him.”
Their work underpins the economics discipline by providing insights into how scarce resources can be allocated, Robert Solow, winner of the Nobel economics prize in 1987, said in a telephone interview.
“I’m glad to hear this,” said Solow, who is professor emeritus at the Massachusetts Institute of Technology in Cambridge. “People who do this kind of basic underlying work often are forgotten.”
The two men’s research focuses on markets that do not use prices to match supply and demand, such as organ donations, said Hubert Fromlet, Professor of International Economics at Linnaeus University and Joenkoeping International Business School in Sweden. Their work “can save lives,” he said in a telephone interview.
“Many of the important things that we do in our lives are matching, from getting into a university, from getting married to getting a job,” Roth told reporters in Stockholm.
He declined to discuss the European debt crisis. “That’s not the kind of economist I am,” he said.
Born June 2, 1923, in Cambridge, Massachusetts, Shapley earned his undergraduate degree at Harvard in 1948 and his doctorate in mathematics from Princeton University in 1953. He worked for Rand Corporation as a research mathematician and taught at Princeton before joining the University of California, Los Angeles in 1981. He is married with two children.
At Princeton, Shapley was for a while a close colleague of John Nash, winner of the Nobel prize in economics in 1994 and subject of the 2001 movie “A Beautiful Mind,” according to a biography by the same name by Sylvia Nasar. The book, first published in 1998, devotes one chapter to Shapley, who it says won the Bronze Star in World War II for cracking a Japanese code.
In 1962 research with the late David Gale entitled “College Admissions and the Stability of Marriage,” Shapley explained how individuals could be paired together in “stable” matches that would last. It was that work in particular that was cited by the Nobel Prize committee.
“He is one of the towering figures in game theory,” Roger Farmer, chairman of the economics department at UCLA, said in a telephone interview, adding, “I think he’s overwhelmed by the attention.”
In 1988, Roth edited a series of essays honoring Shapley’s work, especially what he called a “remarkable” 1953 paper that suggested it might be possible to evaluate, in a numerical way, decisions in games and other interactions between people.
Roth spent more than two decades at the University of Illinois and the University of Pittsburgh before joining Harvard’s economics department and business school.
As a professor, Roth had studied medical matching programs since the early 1980s and by 1995 he got the chance to put his ideas into practice: He began work on a new system that could match young doctors to their first jobs as residents, and it was implemented in 1998.
In 2003, Roth helped redesign the system that determined how students were assigned to schools in New York City. That made it more likely they ended up in the schools their parents preferred.
School administrators and union officials praised the result.
Roth’s work “empowered parents to make a choice by ranking up to 12 high schools according to their preference based upon their values -- location, program, family alumni -- and then matching the student’s preference to the schools with available seats,” Marc Sternberg, deputy chancellor for portfolio planning, said in a telephone interview.
Mark Cannizzaro, executive vice president of the Council of School Supervisors and Administrators, the union representing those two groups, agreed.
“It has its pros and cons, but I think that since it was instituted, as time has gone on, people have become better informed, and the system is operating much better,” he said via phone in an interview.
Roth has also worked with the school systems in Boston, Denver, New Orleans and Washington.
More recently, he helped set up a nationwide kidney exchange that makes it possible to find more matches than regional networks can.
“A lot of people are surprised economists are assisting with kidney exchanges,” Roth told a press conference at Stanford, adding, “Exchanges are what economists are good at.”
Born on Dec. 18, 1951, Roth dropped out of his Queens, New York, high school in his junior year and took classes at Columbia University before enrolling full time. He earned a bachelor’s degree from Columbia in New York in 1971 and a master’s degree and doctorate from Stanford University in Stanford, California, in 1973 and 1974. All three degrees were in the field of operations research. He is married with two children.
Speaking to reporters after the Stanford press conference, Roth said he might use the prize money to buy a home in the area now that he is moving there from Harvard.
Last year’s prize was awarded to U.S. economists Thomas J. Sargent and Christopher A. Sims for their work in exploring cause and effect in policy. In 2009, Elinor Ostrom became the first woman to win when she received the prize together with Oliver Williamson for investigating the limits of markets and how organizations work.
Annual prizes for achievements in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel, the Swedish inventor of dynamite who died in 1896, and the first prizes were handed out in 1901. The economics award was set up by Sweden’s central bank in 1968.
The official name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The money, 8 million kronor ($1.2 million), a gold medal and a diploma, will be handed out to the laureates at a ceremony in Stockholm on Dec. 10, the anniversary of Nobel’s death.
Today’s announcement of the economics prize marks the final award for this year.
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