What You Should Know: Nobel Prize in Economics
Prices are often the easiest way to create an efficient market--the person willing to pay the most gets the thing they want. But in real life, it's not always possible or ethical to put a price on certain things--such as a kidney, or a spot in an elite public high school.
The winners of the 2012 Nobel Memorial Prize in Economic Sciences, Alvin Roth and Lloyd Shapley, developed and applied a matchmaking system, the Gale-Shapley algorithm, that is used to pair new doctors with hospitals, kidneys with patients, and urban students with magnet schools.
Originally developed by Shapley in the 1960s, the "Gale-Shapley algorithm" works like this: Imagine a group of men and women who want to get married. Every man and woman has their preferences ranked in order. Next, the men all propose to their first choice of women. If a woman gets multiple proposals, she picks her top choice, and the other men move to their second choice, and the process repeats. By the end, everyone has a mate, and while not everyone will have their first choice, no one will want to switch. (Try it out yourself, here.)
Throughout the 1980s, Roth looked for ways to apply this situation in real life, and today the Gale-Shapley algorithm pairs 20,000 new doctors up with their top hospital choices (and hospitals up with doctors with specializations or qualifications the hospital wants), finds matching kidneys for the patients in greatest need, and gets public school students in cities including New York and Chicago into their most desired local schools.
Now academics are imagining many new applications for the Gale-Shapley algorithm.
"Among young, leading economists, many are building on things Al Roth did," says Roger Myerson, an economics professor at University of Chicago who won the 2007 Nobel Prize in Economics.
And start-ups, take note: Here are a few places where academics are researching how Gale-Shapley could improve a process or industry, which could transform those processes in the future.
Managing Internet Traffic: To go from one computer to another, data packets travel through a series of routers and switches online--in what can become a massive traffic jam of data. Computer scientists at Stanford and MIT have proposed ways that the Gale-Shapley algorithm could sort which packets go where, so that traffic moves smoothly and those with the tightest deadlines get forwarded as quickly as possible. See for yourself.
Landing Airplanes in a Storm: Bad weather forces airports to reduce the number of planes that land per hour. So when an airline cancels a flight during a storm, what plane gets the coveted landing spot? James Schummer, a professor at Kellogg School of Business, is researching how the algorithm could sort out which flights get priority during bad weather. Here's the study.
Online Dating: In dating, the Gale-Shapley algorithm only works when everyone in the dating pool knows everyone else. That's impossible anywhere outside of the smallest villages. How does real life compare to the theory?
"I usually do research on how people don't fit with what rational economic theory would tells us people do," says Dan Ariely, an MIT Professor and author of Predictably Irrational. But in a 2008 paper that analyzed the dating choices of an online dating site's users, Ariely and his coauthors found real life correlated quite well with what Gale-Shapley predicted. "Over time people figure out who is above their league and below their league and what is the basic level they can aim…this algorithm is not just a good predictor of economic efficiency, it's a good predictor of what people do and when they have lots of experience and lots of time to figure out where they are in society." Read the rest of the findings here.