A Jewish American economist was one of two winners of the 2020 Nobel Prize in economics for studying how auctions work, announced the Royal Swedish Academy of Sciences on Monday.
Paul Milgrom, along with American economist Robert Wilson, won the prestigious annual prize “for improvements to auction theory and inventions of new auction formats,” announced the academy.
Both professors at Stanford University, they “have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies. Their discoveries have benefitted sellers, buyers and taxpayers around the world,” said the academy.
People have always sold items to the highest bidder or bought them from whoever makes the least expensive offer. Objects worth astronomical sums of money change hands every day in auctions—not only household objects, art and antiquities, but also securities, minerals and energy. Public procurements can also be conducted as auctions.
Using auction theory, researchers try to understand the outcomes of different rules for bidding and final prices—the auction format. The analysis can be difficult because bidders behave strategically based on available information, taking into consideration what they know themselves and what they believe other bidders to know.
Wilson, 83, developed the theory for auctions of objects with a common value, which may be uncertain beforehand, but in the end, is the same for everyone. Examples include the future value of radio frequencies or the volume of minerals in a particular area. Wilson showed why rational bidders tend to place bids below their own best estimate of the common value; they tend to be worried about the winner’s curse—paying too much and losing out.
Milgrom, 72, formulated a more general theory of auctions that not only allows common values but also private ones that vary from bidder to bidder. He analyzed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during the bidding process.
Societies have allocated ever more complex objects among users, such as landing slots and radio frequencies. In response, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously on behalf of a seller motivated by broad societal benefit rather than maximal revenue.
In 1994, the U.S. authorities first used one of their auction formats to sell radio frequencies to telecom operators. Since then, many other countries have followed suit.
Milgrom was born in 1948 in Detroit. He graduated with an associate bachelor’s in mathematics from the University of Michigan in 1970, earning his master’s degree in statistics and a doctorate in business in 1978 and 1979, respectively, at Stanford. Wilson was his doctoral advisor.
Wilson, who lives on the same street as Milgrom, knocked on the door and rang the video doorbell of his fellow winner in the early hours on Monday morning to inform his colleague that he won the prize since the Nobel committee could not reach him (based in Stockholm, it is announced at 2:45 a.m. California time).
Milgrom wasn’t the only Jewish Nobel recipient this year.
Harvey J. Alter was a co-winner of the Nobel Prize in Physiology or Medicine, while Louise Glück won the prize in literature.
The #NobelPrize committee couldn't reach Paul Milgrom to share the news that he won, so his fellow winner and neighbor Robert Wilson knocked on his door in the middle of the night. pic.twitter.com/MvhxZcgutZ
— Stanford University (@Stanford) October 12, 2020