1. Management of Common Pool Resources
In 2009, An Indiana University political science professor, Elinor Ostrom, became the first woman to win the prize. She received the prize it "for her analysis of economic governance, especially the commons." Ostrom's research showed us how groups coordinate and work together to manage common resources such as water supplies, fish, lobster stocks, and pastures through collective property rights. Ostrom even showed that ecologist Garrett Hardin's prevailing theory of the "tragedy of the commons" is not the only possible outcome, or even the most likely outcome when people share a common resource. Hardin's theory says that common resources should be owned by the government or atleast divided into privately owned lots to prevent the resources from becoming depleted by overuse. He mentionedthat each individual user will try to obtain maximum personal benefit from the resource to the detriment of later users. Ostrom showed that common-pool resources can be effectively managed collectively, even without government or private control, as long as those using the resource are physically close to it or have a relationship with each other. Because outsiders and government agencies do not understand local conditions or norms, and also lack relationships with the community, they may manage common resources poorly. By contrast, insiders who are given a say in resource management will self-police to ensure that all the participants follow the community rules.
2. Behavioral Economics
The 2002 prize went to the psychologist Daniel Kahneman,"for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty." Kahneman then showed that people do not always act out of rational self-interest, as the economic theory of expected utility maximization says. This concept is crucial to the field of study which is known as behavioral finance.Then Kahneman conducted his research with Amos Tversky, but Tversky was not eligible to receive the prize because he died in 1996 and the prize was not awarded after his death. Kahneman and Tversky identified cognitive biases which causes people to use faulty reasoning to make irrational decisions. These biases include the anchoring effect, the planning fallacy, and also the illusion of control. Their article, "Prospect Theory: An Analysis of Decision Under Risk," was one of the most frequently cited in economics journals. Their award-winning "prospect theory" shows how people actually make decisions in uncertain situations. We often prefer using irrational guidelines such as perceived fairness and loss aversion, which are based on emotions, attitudes,memories and not logic. For example, Kahneman and Tversky observed that we will expend more effort to save just a few dollars on a small purchase rather than to save the same amount on a large purchase.
3. Asymmetric Information
In 2001, George A. Akerlof, A. Michael Spence, and Joseph E. Stiglitz won the nobel prize "for their analyses of markets with asymmetric information." The trio showed us that economic models predicated on perfect information are often misguided because, in reality, one party to a transaction generally has superior information, a phenomenon known as "information asymmetry" An understanding of information asymmetry has improved our understanding of how various types of markets actually work and also the importance of corporate transparency. Akerlof showed how information asymmetries in the used car market, where the sellers know more than the buyers about the quality of their vehicles, can create a market with numerous lemons. A key publication related to this nobel prize is Akerlof's 1970 journal article, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism."15 Spence's research focused on signaling and also on how better-informed market participants can transmit information to lesser-informed participants. For example, Spence showed how job applicants can use educational attainment as a signal to prospective employers about their likely productivity and also how corporations can signal their profitability to investors by issuing dividends. Stiglitz showed how insurance companies can learn which customers present a greater risk of incurring high expenses by offering different combinations of deductibles
4. Game Theory
The academy awarded the 1994 prize to John C. Harsanyi, John F. Nash Jr., and Reinhard Selten "for their extraordinary analysis of equilibria in the theory of non-cooperative games." The theory of non-cooperative games is a branch of the analysis of strategic interaction which is commonly known as "game theory." Non-cooperative games are those games in which participants make non-binding agreements. Each participant bases their decisions on how they expect other participants to behave, without knowing how they will actually behave. One of Nash's major contributions was the Nash Equilibrium,which is a method for predicting the outcome of non-cooperative games based on equilibrium. Nash's 1950 doctoral dissertation, "Non-Cooperative Games," details his theory. The Nash Equilibrium expanded upon earlier research on two-player, zero-sum games. Selten then applied Nash's findings to dynamic strategic interactions, and Harsanyi applied them to scenarios with incomplete information to help develop the field of information economics. Their contributions are widely used in economics, such as in the analysis of oligopoly and the theory of industrial organization and have inspired new fields of research. 5. Public Choice Theory
James M. Buchanan Jr. received the prize in 1986 "for his development of the contractual and constitutional bases for the theory of economic and political decision-making." Buchanan's major contributions to public choice theory brought together insights from political science and economics to explain how public-sector actors (e.g., politicians and bureaucrats) make decisions. He even showed that, contrary to the conventional wisdom that public-sector actors act in the public's best interest, politicians and bureaucrats tend to act in their own self-interest, just like private-sector actors (e.g., consumers and entrepreneurs). He further described his theory as "politics without romance."
Using Buchanan's insights regarding the political process, human nature and free markets, we can understand better the incentives that motivate political actors and also better predict the results of political decision-making. We can then design fixed rules which are more likely to lead to desirable outcomes.
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