The Nobel in Economics: How It's Already Improved Our Lives

Lloyd S. Shapley Nobel Prize in Economics
Lloyd S. Shapley Nobel Prize in Economics

By Libby Kane

Ever heard of "The theory of stable allocations and the practice of market design?" Yeah, us neither.

But besides being the work that earned the 2012 Nobel Prize in Economics for Americans Alvin E. Roth and Lloyd S. Shapley last week, it's also something that affects your daily life.

Roth's and Shapley's work, carried out over six decades, isn't only award-winning: It presents a more efficient solution for schools, for organ donation and even for marriage.

So how exactly could economic theory have helped improve–and even predict–some major turning points of your life such as education or choosing a life partner? Read on.

How Their Work Has Affected Daily Life

These two economists work on the abstract-sounding ideas of market design and matching theory, which have to do with making marketplaces (say, the market for organs) more efficient. Their particular focus is on matching in markets without prices–that is, how do you pair a person with a position, or an organ with a donor, or make any match satisfy everyone involved when there's no price tag to show they're of equal value?

For instance, kidney donations posed a tricky problem: Let's say a person wanted to donate to a friend in need, but they weren't matches. Across the country, another pair of friends were in the same position and the donor in the first couple was a match with the patient in the second couple, and vice versa. While the solution in this simple scenario is for the two donors to donate to the other's friend, in real life, the probability of the problem being so neatly solved is low. Most likely, a solution would involve many pairs of willing donors and patients in need.

Roth created a database for all willing donors and all patients that makes sure the maximum number of people in need receive kidneys using the minimum number of people.

Roth expanded Shapley's research to try to solve real-life issues, such as the following:

School districts. Districts in New York City, Boston, Chicago and Denver use a system based on their research to assign students to high schools. Before Roth helped design the New York City high school selection process, about 30,000 students a year ended up in schools they had not even ranked as a preferred school. In the first year his design was used, the 2004-2005 academic year, the number of students who went to a school they had not requested was just 3,000.

Medical Residencies. In the 1980s, Roth applied the research to create a system wherein medical students applying to hospital residencies were placed in more mutually beneficial positions. Before then, the system was designed in a way where students could be shut out of a residency completely. In order to prevent that, students were gaming the system by ranking less popular residencies high on their list, even if they did not want to go there. Roth's system allows medical students to rank their residencies honestly without fear that they will not get in anywhere.

And similar systems are being proposed and developed for the following:

Internet Traffic. Right now, the sheer volume of internet traffic can lead to congestion and delays (otherwise known as "Why won't this load?"). Researchers at MIT have proposed a revised algorithm to keep traffic moving as quickly as possible.

Landing Airplanes. Anyone who has flown before knows that when there's a storm, landings get tricky, which leads to all sorts of delays. A professor at the Kellogg School of Business is examining how to figure out which planes get landing priority in bad weather, using Roth and Shapley's work.

Could an Algorithm Predict Love?

And then there's a final way in which the work of these economists applies to our lives: love.

Shapley's original research in the 1950s was theoretical and based on marriage–in fact, he and David Gale created the Gale-Shapley algorithm, which addresses the Stable Marriage Problem, which asks how to create stable marriages among a group of people so that no two people in any couple would rather be with each other than with their current partner.

Their solution was to have everyone rank their choices of partner from first to last. All the men would propose to their top choice woman, and any woman with more than one proposal would make her top choice. Men who don't get their first choice would move on to their second choice and so on down the line until everyone is matched–not necessarily blissful, but happy enough to stick with it. (This cool site lets you test it out.)

Sponsored Links

It sounds appealing, doesn't it? The thought we could skip the dates in favor of an algorithm that could ensconce us in stable partnerships?

Well, actually, this algorithm is exactly what happens in real life. (Well, sort of. You don't get to skip the dating). Professor Dan Ariely (who researches dishonesty and told us how financial fibbing can help you) conducted research in online dating, and the results matched up with what was predicted by the algorithm.

"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."

Roth said at a press conference following the award that many of the milestones in people's lives–getting into the school or program of your choice, marriage–are about forming mutually beneficial matches, and understanding that process is his and Shapley's life's work.

So, next time you face a big life milestone that involves making a match, you can thank these Nobel Prize winners for coming up with the algorithm that explains how you did it.

See more articles on LearnVest:

How Raising the Minimum Wage Would Help the Economy

The Personal Finance Message In "Gangnam Style"

6 Ways to Combine Finances With Your Partner