Explaining Southern California's economy

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:

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