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10 October 2005

The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, 2005, jointly to

Robert J. Aumann
Center for Rationality, Hebrew University of Jerusalem, Israel and

Thomas C. Schelling
Department of Economics and School of Public Policy, University of Maryland, College Park, MD, USA,

“for having enhanced our understanding of conflict and cooperation through game-theory analysis”.

Conflict and cooperation through the lens of game theory

Why do some groups of individuals, organizations and countries succeed in promoting cooperation while others suffer from conflict? 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.

Thomas Schelling

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.

Robert Aumann

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.

Read more about this year’s prize

Robert J. Aumann, born 1930 (75 years) in Frankfurt, Germany (Israeli and US citizen). PhD in mathematics in 1955 from Massachusetts Institute of Technology (MIT), Cambridge, MA, USA. Professor at the Center for Rationality, Hebrew University of Jerusalem, Israel.

Thomas C. Schelling, born 1921 (84 years) in Oakland, CA, USA (US citizen). PhD in economics in 1951 from Harvard University, Cambridge, MA, USA. Distinguished University Professor at the Department of Economics and School of Public Policy, Emeritus, at University of Maryland, College Park, MD, USA and Lucius N. Littauer Professor of Political Economy, Emeritus, at Harvard University.

The Prize amount: SEK 10 million, will be shared equally between the Laureates.

Contact persons: Fredrik All, Information Officer, phone +46 8 673 95 63, +46 706 73 95 63, [email protected] and Eva Krutmeijer, Head of Information, phone +46 8 673 95 95, +46 709 84 66 38, [email protected]