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Who Won the Nobel Prize? And Why Should We Care?

Oct. 15, 2012
Personal Finance
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Alvin Roth and Lloyd Shapley were awarded the Nobel Prize in Economics for their work on matching theory and market design. The Royal Swedish Academy, which selects Nobel Prize winners, announced today that “the combination of Shapley’s basic theory and Roth’s empirical investigations, experiments and practical design has generated a flourishing field of research and improved the performance of many markets.”

Matching theory? Market design? What does this all mean?

Roth and Shapley’s work addresses the fundamental question in economics – how to match supply and demand as well as possible? Shapley looked at why resource allocation systems in different markets were not working and derived matching methods fix them. Roth was then able to apply Shapley’s matching methods and design systems to solve real problems in the real world – matching students to schools, jobs to workers, husbands to wives and organ donors to patients.

Let’s say that your partner has been diagnosed with kidney disease and need a new kidney in order to survive. You want to give your partner your kidney but your kidney is not compatible for her. What do you do now? Do you just wait around hoping for a miracle?

Thanks to Roth’s work to improve the organ donation system, you can now participate in paired organ donations. A wife in San Francisco and a wife in New York both need kidneys, and both their husbands are willing to donate a kidney. However, the husbands are not matches for their respective wives. Paired organ donations now allow one husband to give to the wife of the other husband who gives to his wife – it’s a kidney swap that is mutually beneficial for both couples.

Similar matching methods have been established in medical student residency match program and public school systems. The idea is to level the playing field and better allocate scarce resources to serve the interests of all people involved.

Congratulations Roth and Shapley on the Nobel Prize in Economic Sciences!