How Nobelist Al Roth Fixes Broken Markets

By Shlomo  Maital  

  This year’s Economics Nobel was awarded to Harvard Prof. Al Roth, along with fellow game theorist Lloyd Shapley.

  Roth’s work is in a rather abstract branch of mathematics known as game theory.  But it turns out to be highly practical.  It has helped people who need kidney transplants.  Here is why.

   According to an article in Harvard Business School’s Working Knowledge:   

“An economic handyman of sorts, Alvin E. Roth fixes broken markets.  As a Nobel Prize-winning pioneer in the field of market design, the Harvard Business School professor cofounded a kidney donation matching system for New England, corrected public school choice programs in New York and Boston, and tackled the market for new medical residents, economists, and lawyers. (Forbes magazine named him one of the world’s “seven most powerful new economists.”)   “Market design is the engineering part of game theory,” Roth explains. “It’s the underlying science of how the details work and how the parts fit together. We deal with much more complicated games than the game theory usually deals with.”

 “In short, Roth has determined that successful marketplaces require three key elements. “They must be thick, uncongested, and safe,” he says.  “Market design teaches us both about the details of market institutions and about the general tasks markets have to perform.”Having sufficient “thickness” means there are enough participants in the market to make it thrive. “Congestion” is what can happen when markets get too thick too fast: there are heaps of potential players, but not enough time for transactions to be made, accepted, or rejected effectively. “Safety” refers to an environment in which all parties feel secure enough to make decisions based on their best interests, rather than attempts to game a flawed system.

“In 2004, he and fellow economists Tayfun Sönmez and M. Utku Ünver coauthored a paper showing that the kidney exchange market would benefit from an official clearinghouse that included a computerized database of incompatible patient-donor pairs. In addition to direct exchanges, the paper described exchanges that included three- and four-way matches—as well as a system in which a donor could give a kidney to a stranger in exchange for the donor’s loved one receiving high priority on the cadaver waiting list.

  “They sent the paper to several kidney surgeons. The medical director of the New England Organ Bank met with Roth to pursue the idea further. This led to the founding of the New England Program for Kidney Exchange, which culls data from 14 transplant centers in the New England area, allowing incompatible donor pairs to find possible exchanges. So far, the program has been responsible for 73 successful exchanges. (Hospitals elsewhere have followed suit. Nationally, in 2005 there were 27 reported transplants involving an exchange; in 2007, there were121 such transplants; and in 2009, 304.)

   Now, the real challenge.  Can Nobelist Roth fix the world’s broken financial markets?  They are THICK.   But they are pretty CONGESTED.  Too many players, too fast trading.  But safe???   Do we trust the banks and those who trade?   A survey shows only 15% of Americans now trust their stock market.   How in the world do we restore that trust?  Financial markets may be one market even the brilliance of Al Roth cannot fix.