American, Israeli Share Nobel Prize in Economics

STOCKHOLM, Sweden – Israeli-American Robert J. Aumann (search) and American Thomas C. Schelling (search) won the 2005 Nobel Memorial Prize in Economic Sciences on Monday for their work on game theories that help explain political and economic conflicts from arms races to price wars.

"Why do some groups of individuals, organizations and countries succeed in promoting cooperation while others suffer from conflict?" the Royal Swedish Academy of Sciences (search) said.

Schelling, 75, is a professor at the University of Maryland's (search) department of economics and a professor emeritus at Harvard. Aumann, 84, is a professor at the Center for Rationality at the Hebrew University of Jerusalem (search).

It was the sixth straight year that Americans have won the prize, or had a share in it.

Aumann and Schelling were cited for using game-theory analysis to "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'etre of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements," the citations said.

"I feel great," Aumann, reached by telephone in Israel, told The Associated Press. He told the prize committee, "This was a total surprise. I'm totally overwhelmed."

Reached by the AP at his home in Bethesda, Md., Schelling said he knew his co-winner, but had never worked with him.

"They [the Nobel committee] linked us together because he is a producer of game theory and I am a user of game theory," he said. "I use game theory to help myself understand conflict situations and opportunities."

The academy, in its citation, lauded Schelling for showing "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."

Those insights, the academy said, "have proven to be of great relevance for conflict resolution and efforts to avoid war."

Aumann was cited for his work in looking at how real-world situations can affect the theory.

"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," the academy said. "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."

Game theory (search), which is often used in a political or military context to explain conflicts between countries, can also be applied to the business world.

"The understanding of game theory helps explain economic conflicts like price competition and commerce wars," said Jorgen Weibull, chairman of the prize committee.

Aumann was born in Frankfurt, Germany, but holds U.S. and Israeli citizenship. He is not the first Israeli to win the economics prize. In 2002, Daniel Kahneman, who also has U.S. and Israeli citizenship, shared the award.

It was the sixth consecutive year that Americans have won the prize.

Last year's winners were Edward C. Prescott, an Arizona State University professor, and Norwegian Finn E. Kydland, an economics professor at the University of California, Santa Barbara, who won for their research on how government policies affect economies around the world and why supply-side shocks like high oil prices can dampen business cycles.

The economics prize, worth 10 million kronor ($1.3 million), is the only one of the Nobel awards not established in the will of Swedish industrialist Alfred Nobel, the inventor of dynamite. The medicine, physics, chemistry, literature and peace prizes were first awarded in 1901, while the economics prize was set up separately by the Swedish central bank in 1968.