Paul Milgrom (right), David Kreps (center), and Robert Wilson (left). Together they received the 2018 John J. Carty Award for the Advancement of Science in the field of economics. Together with other collaborators and, in particular, D. John Roberts, they employed techniques to model and study reputation and collusion, both of which have broad applications in macroeconomics, industrial organization, and labor economics. | Photo by Elena Zhukova
Award winners Paul Milgrom, Robert Wilson, and David Kreps discuss trends and shifts in the field of economics.
In 2018, we sat down with three Stanford GSB economists — Robert Wilson, David Kreps and Paul Milgrom — to hear their thoughts on the future of their field. Two years later, Wilson and Milgrom were awarded the Nobel Prize in economics.
Game Theory and the Human Element
At the time of the interview, the three professors had just been honored with The National Academy of Sciences 2018 John J. Carty Award. Wilson, Kreps, and Milgrom reflected on their greatest contributions to the field — while looking ahead to how the science of economics is evolving. Economics, they say, complements other disciplines. And the human factor is part of the puzzle.
“In 1990, roughly, then-Dean Chuck Holloway told Jim Baron [then a Stanford GSB economics professor] and me to develop and teach a course on human resource management,” recounts Kreps, the Adams Distinguished Professor of Management, Emeritus. “It was to be a ‘he said, she said’ affair. I’d say what economics has to say on some question; Jim would say what sociology and social psychology had to say; and the students would be left to sort out the conflicting viewpoints. But we found that economics … and sociology and social psychology were complementary. Each filled in pieces of the puzzle that the others omitted.”
The researchers discuss “game theory” — a theoretical framework to study how and why individuals and entities make decisions about their situations.
“In game theory, for example, you need to know what people want and how they form their beliefs about what’s going on,” Kreps continues. “Social psychology looks at how your tastes and beliefs are shaped by experiences. So while economics provides a framework for analysis, social psychology supplies the human element.”
“At the same time, pioneers in game theory… were developing highly mathematical tools to analyze problems of social interaction,” adds Milgrom, professor of economics (by courtesy) and the Shirley R. and Leonard W. Ely Jr. Professor of Humanities and Sciences, Stanford School of Humanities and Sciences.
“Those tools offered new ways to describe much older models, such as those dealing with oligopolies….,” Milgrom continues. “For economists to embrace game theory as a tool, we needed to do more than repackage old theories into a new language. We needed to develop models that would solve real-world economic problems. So we used game theory to analyze issues like bargaining and bidding in auctions.”
Economics in the Digital Age
Looking ahead, Wilson, the Adams Distinguished Professor of Management, Emeritus, foresees changes in market organizations “due to rapid advances in digital technologies.”
Wilson notes: “Some are incremental, as in a stock market where simple limit orders are replaced by computer programs that implement trading algorithms. Others offer opportunities for major advances, as in auctions that allow bids for packages of several maturities of Treasury bonds, or packages of securities and related options and swaps. Market designs must also address newly enabled strategies, such as ‘front running’ large orders to give certain traders an unfair advantage, or ‘dark pools,’ which are private forums for trading securities. These examples from financial markets are indicative of developments in many other contexts affected by pervasive conversion to electronic commerce.”
