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FAQ: All you need to know about Al Roth and Lloyd Shapley's economics Nobel Prize

Nobel Economics

Reed Saxon/AP

Shortly after being awakened and learning the news, Lloyd Shapley, one of two Americans who were awarded the Nobel economics prize, talks to a reporter from his home in the Pacific Palisades area of Los Angeles. A giant of "game theory," Shapley, retired from UCLA, shared the prices with Al Roth, who's coming to Stanford from Harvard.

Harvard Business School Professor Alvin Roth, now a visiting professor at Stanford University, and UCLA mathematician-economist Lloyd Shapley have been awarded the 2012 Nobel Prize for Economics (which isn't exactly like other Nobel Prizes; being awarded only since 1969).

They didn't really work together but developed complementary insights into something called "game theory" and its real-world applications.  

Q: What is game theory?

A: Game theory is a branch of mathematics that was developed by ultra-super-mega genius John von Neumann. It concerns, in a vulgar nutshell, decision-making in a competitive framework. Ever heard of a "zero-sum game?" That's game theory — two players, one total winner and one total loser, as in a chess match. The math is 1 + -1 = 0, hence a "zero-sum game," with one point up for grabs. The dynamics of this type of reasoning were immediately attractive to Cold War strategists, who had to figure out how to "win" a nuclear war. Shapley, 89, is at UCLA now but based on a statement that the university released, is retired. He spent nearly 30 years at the RAND Corp. in Santa Monica, which was the global epicenter of game theory as a geopolitical discipline. Ever seen the movie "War Games?" It's the most famous example ever of (simplified) game theory in pop culture:

Joshua [a Defense Department computer]: Shall we play a game?

Matthew Broderick [as David]: Love to! How about...Global Thermonuclear War?"

Joshua: Wouldn't you prefer a good game of chess?"

MB: Let's play...Global Thermonuclear War.

J: Fine.

MB: All right!!!

We all know how it ends — Joshua, with NORAD panicking and thinking a real Soviet nuclear strike is on the way, plays out simulations like tic-tac-toe until it figures out that mutually assured destruction means no winner. 

RELATED: UCLA professor one of two Americans awarded Nobel economics prize

Q: But what about the other guy?

A: Alvin Roth, who has been on observers' Nobel short list for years, used Shapley's work in game theory to further the process of "market design." The key thing here is that Roth pondered markets where pricing is unavailable. Imagine you want to buy a car. You decide how much you want to spend — $15,000, $100,000 — and you make a purchase. Prices can guide your decision-making. But when you aren't just choosing but being chosen, such as when you apply to be a medical resident at a hospital, the process can become incredibly messy as "players" in the "game" try to manipulate the outcome. Roth, in cooperation with others, developed an algorithm that solved the problem and made it possible to equitably match residents and hospital. If this sounds a little like the Nobel Committee gave a prize for a very sophisticated type of matching or dating ... well, it pretty much did. In fact, one of Shapley's most famous contributions to economics was to solve the problem matching a group of men and women in marriages that would be "stable" — marriages that neither partner wanted to exit for a better wife or husband.

Roth also developed a kidney donation "market" that matches donors and recipients based on blood type so that couples with incompatible blood types can be matched with compatible couples, without the system becoming so complex that it's unmanageable.

Q: I'm sorry, but I'm not seeing any money in here. Isn't economics about money?

A: Well, the prize itself is worth $1.2 million. But what Roth and Shapley have worked on using math and economics to solve problems that are outside the realm of financial markets. In fact, when it comes to kidney donations, for example, bidding for the organs is forbidden, for obvious reasons. But Roth and Shapley look at the difficult of fairly allocating scarce resources among competitive players, and that is a type of economics. Eight game-theory researchers have won the Nobel, most recently in 2005. John Nash, of the book and film "A Beautiful Mind," is probably the best-known. But Shapley is a giant in the field.

Q: Kind of a big deal for California, isn't it?

A: Yes. Roth is moving from Harvard to Stanford, and of course Shapley has lived in Los Angeles since coming West back in the 1950s. The last time Angelenos could take pride in a Nobel economics winner was when L.A. native Elinor Ostrom (who died earlier this year) won back in 2005.

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