(Copyright National Post 2005)

Cold War meets trade war: Israeli, American share award for game theory

Thomas Schelling knows the value of seeming just a little crazy, and for that he has won a Nobel.

The idea of projecting an aura of irrationality, the Harvard economics professor said during the height of the Cold War, could intimidate adversaries.

"It is not a universal advantage in situations of conflict to be inalienably and manifestly rational in decision and motivation," he wrote.

His groundbreaking works during the Soviet era used game theory methods to explain the era's most vital issues, global security and the arms race.

But his theories became even more relevant in the era of the Axis of Evil. Decades ago, Dr. Schelling noted the ability to retaliate can be more useful than the ability to resist an attack.

Dr. Schelling, 84, won the Nobel Prize in economics yesterday for using game theory to explain conflict resolution. Dr. Schelling and Robert Aumann, a 75-year-old mathematician at Hebrew University in Jerusalem, were honoured for their contribution to understanding why "some groups of individuals, organizations and countries succeed in promoting co-operation while others suffer from conflict," the Royal Swedish Academy of Sciences, which selects the winner, said yesterday in Stockholm.

"Game theory is about how individuals react when they are somewhat affected by other peoples' actions," said Dr. Schelling, now a professor at the University of Maryland.

"For example, when you're driving through an intersection, the outcome depends not just on your own actions but on what other drivers do."

Their work goes beyond the frontiers of traditional economics into psychology, sociology and strategic studies and has helped analyze trade disputes, organized crime, political decisions and wage negotiations, as well as wars.

In economics and business, it clarified why initially competing firms would eventually collude to fix prices or why farmers would share pastures or irrigation systems.

It also shed light on such everyday phenomena as the audience's choice of seats at a concert or societal issues like racial and sexual discrimination.

Dr. Schelling's 1960 work, The Strategy of Conflict, became a classic and has influenced generations of strategic thinkers, the jury said. "These insights have proven to be of great relevance for conflict resolution and efforts to avoid war," it said.

Having worked on the Marshall Plan -- the U.S. post-war aid program for battle-ruined Europe -- and at the White House in the 1950s, he was well placed to examine the rationale behind the superpowers' nuclear standoff.

In particular, he has tried to explain how a taboo around nuclear weapons after the bombing of Hiroshima in 1945 itself became a factor in deterring their use after the Second World War, even as both sides of the Cold War amassed big nuclear arsenals.

In a 1978 work, Dr. Schelling also used examples from everyday life, such as the difficulty in trying to get hockey players to overcome their fear of being at a competitive disadvantage and wear helmets, even though it would protect their heads.

He explained that one reason why people do not wear helmets may be vanity: If few people wear helmets, one would not for fear of looking like a coward; but if most people wear them, one would. Therefore, the individual utility of wearing a helmet is low.

Building on Dr. Schelling's original ideas, Dr. Aumann then applied the tools of mathematical analysis to highlight the alternatives available to one's own country and the opponent in times of conflict. Dr. Aumann went on to show that the choice for co- operation rather than war is more easily achieved in long-term relationships rather than single encounters.

He became the first to create analysis of "infinitely repeated games," which helped understand why some people or communities co- operate better than others over time, even though they were initially suspicious of one another.

The announcement marked the second time in 11 years that the Royal Academy has awarded the prize to academics who were instrumental in developing game theory. In 1994, it awarded the prize to John C. Harsanyi, Reinhard Selten and John F. Nash Jr. for their game-theory work. Dr. Nash's life and his difficulties with schizophrenia were documented in the 2001 film A Beautiful Mind.

Dr. Schelling said yesterday he was caught off guard by the prize and told Sweden's TT news agency he did not know yet what to do with his half of the $1.5-million prize, but that it would go to "something useful."

He added he was "honoured" to share the prize with Dr. Aumann, with whom he had never collaborated.

Dr. Aumann, born in Frankfurt in Germany in 1930, fled with his family to New York in 1938 to escape Nazi persecution and later settled in Israel.

The Nobel Economics Prize, the fifth of the six coveted prizes to be awarded this year, is the only one not originally included in the 1895 last will and testament of the creator of the awards, Swedish inventor Alfred Nobel.