Applying game theory – interactive decision scenarios – they focused on why some people and countries manage to cooperate, while others suffer from conflict.
Their work goes beyond the frontiers of traditional economics into psychology, sociology and strategic studies and has helped analyse trade disputes, organised crime, political decisions and wage negotiations, as well as outright shooting wars.
In economics and business, it has clarified why initially competing firms will eventually collude to fix prices or why farmers will share pastures or irrigation systems.
But it also sheds light on everyday phenomena like the audience’s choice of seats at a concert or societal issues like racial and sexual discrimination.
After Professors Schelling and Aumann’s theory, seemingly irrational behaviour could suddenly be explained.
“Their work has transformed the social sciences far beyond the boundaries of economics,” said the jury, praising Professor Schelling’s ability to introduce original ideas with a minimum of mathematical tools.
Professor Schelling, now 84 and professor emeritus at the University of Maryland, produced his main work during the Cold War which pitted the United States against the Soviet Union, using game theory to explain the era’s most vital issues, global security and the arms race.
Having worked on the Marshall Plan – the US postwar aid program for battle-ruined Europe – and at the White House in the 1950s, Professor Schelling was well placed to examine the rationale behind the superpowers’ nuclear standoff.
The Cold War, when the world’s survival could depend on accurately predicting the opponent’s next move, was a fertile ground for game theorists.
Professor Schelling showed that the ability to retaliate can be more useful than the ability to resist an attack, and that it may be good to keep your enemy in the dark over how your retaliation will look.
Building on Professor Schelling’s original ideas, Professor 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.
Professor Aumann, who is 75 and worked at the Centre for Rationality at Jerusalem’s Hebrew University, went on to show that the choice for cooperation rather than war was more easily achieved in long-term relationships than in single encounters.
He became the first to create analysis of “infinitely repeated games”, which helped explain why some people or communities cooperate better than others over time, even though they are initially suspicious of one another.
Professor 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.
Professor Schelling said that he was caught off guard by the prize and told Sweden’s TT news agency he didn’t know yet what to do with his half of the prize sum of A$1.7 million, but that it would go to “something useful.”
Professor Aumann said he was delighted with the prize.
“On the one hand, this is a prize for Israeli science and for the Hebrew University of Jerusalem, but it’s also a prize for the world community of game theorists,” he told a press conference at the university where he has been teaching for the past half century.
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 Swedish inventor Alfred Nobel.
It was created by the Swedish Central Bank in commemoration of its tricentenary in 1968, and was first awarded in 1969.