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October 13, 2020

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Nobel Prize for US economists

Source: Agencies | 00:00 UTC+8 October 13, 2020 | Print Edition

TWO American economists won the Nobel Prize yesterday for improving the theory of how auctions work and inventing new and better auction formats that are now woven into many parts of the economy, including one that revolutionized the telecoms industry.

The discoveries of Paul R. Milgrom and Robert B. Wilson “have benefitted sellers, buyers and taxpayers around the world,” the Nobel Committee said, noting that the auction formats developed by the winners have been used to sell radio frequencies, electricity, fishing quotas and airport landing slots.

Milgrom, 72, and Wilson, 83, notably came up with formats for selling interrelated items simultaneously. In 1994, US authorities used one of their auction designs to sell radio frequencies to telecom operators, a move since copied in other countries.

Among the insights of the two Stanford University economists is an explanation of how bidders seek to avoid the so-called “winner’s curse” of over-paying, and what happens when bidders gain a better understanding of their rivals’ sense of value.

Wilson showed that rational bidders tend to place bids below their own best estimate of what he called the “common value” — that is, when the value of an item is deemed to be the same for everyone — for fear of paying too much.

Milgrom complemented that with theories on “private values,” when the perceived value of something differs from bidder to bidder. He demonstrated that an auction format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during the bidding process.

The 10-million-Swedish-crown (US$1.14 million) economics prize is not one of the original five awards created in the 1895 will of industrialist and dynamite inventor Alfred Nobel, but was established by Sweden’s central bank and first awarded in 1969.

Speaking to reporters by telephone, Wilson welcomed the “happy news” of the award and revealed that his own personal experience of auction participation was limited.

“Myself, I have never actively participated in an auction,” Wilson said. “My wife points out that we bought skiboots on eBay — I guess that was an auction.”

Milgrom said that Wilson, who was his PhD advisor and lives across the street from him in Stanford, California, came to knock on his door in the pre-dawn hours to tell him of their shared award because his phone had been on silent mode so he could sleep.

Milgrom played down the winner’s curse, saying the main thing was to be aware of it.

Even with all the data available today, bidders are often paying for uncertainty, Milgrom said.

“For example, if you were bidding for oil on some tract and you don’t know how much oil is down there. The data isn’t going be available until you’ve drilled.

“You have to make estimates of that that are only roughly guided by the data. If your estimates are wrong, you’re subject to the winner’s curse,” Milgrom said.

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