Robert B. Wilson

Nobel 2020 | Can auctions guarantee fair competition? 

Robert Wilson is an economist’s economist, even though he never set out to explicitly enter the field. He studied math, philosophy, and went to business school. He was in his forties when he decided to take a sabbatical year to spend in the economics department, which ultimately became a full time occupation within the field. While his path to economics may not have been a linear one, his work on market design, industrial organization, game theory, and auctions has fundamentally reframed how economists view group behavior and the use of tools like lotteries.

Photo of Robert B. Wilson

Robert B. Wilson

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2020

At a glance

Born: 1937, Geneva, USA

Field: Game theory

Awarded: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2020 (shared)

Prize-winning work: Improvements to auction theory and inventions of new auction formats

Saturday morning tradition: He spent many weekends as a child attending cattle auctions, watching farmers buy or sell cattle

Reset and recharge: The natural world is his preferred backdrop when he needs to disconnect and change his mindset

Candid camera: Footage of Wilson waking up his co-laureate Paul Milgrom to announce the news of their win was captured on Milgrom’s home security camera and went viral after being shared by a Stockholm newspaper

How can Game Theory help us design fair and efficient markets?

Wilson had long been interested in how information asymmetry plays a role in strategic behavior. When people or firms have opposing preferences and uncertainty exists, how can systems be designed in a way that promotes competition while staying fair and efficient? Game theory became, to Wilson, the perfect lens to examine these types of questions under.

What is Game Theory?

“Game theory is just a multi-person situation where their decisions interact in some way,” says Wilson. “The essential feature is the strategic behavior that people are thinking through, not only the immediate consequences of their decisions, but how other people will react and how they will react to what others do. So if it has a dynamic structure, then there’s all this potential for it to either deteriorate into conflict with bad outcomes for both parties or good outcomes for both parties. And that's a lot of what we want to study, is why it is some situations lead to inferior outcomes and some to superior outcomes.”

How did Robert Wilson use game theory to improve market design?

Wilson expanded on economic work that came before him, reevaluating how markets operate and removing money from the equation entirely, looking at markets for matching, the work Alvin Roth was awarded the prize for, and the role that private information plays.

“Economists didn't use to think they knew how to even formulate how a market works without money,” he says. “It’s not exactly restructuring standard economic theory, it’s more infusing it with game theory and analysis of treated strategic behavior.”

This has become his life’s work, putting small otherwise irrelevant pieces together to build new methodology around how we think about markets and particular applications. Auction theory ultimately became a central piece of this.

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How Market Design Emerged from Game Theory

How do auctions promote fair competition?

With game theory and strategic behavior as the backdrop, Wilson saw auctions as the ideal structure under which to conduct research. Whereas much of the economic theory at that time had been centered around supply and demand as the equation to determine prices, Wilson wondered what was happening within different markets. He wanted to know how they were run and what the procedural rules looked like.

“There is so much informational content in the price,” he says. “The economy in general is this information system of telling people to invest here, buy that, because they’re telling you how much something is worth. Auctions are the means by which those price signals are formed and a way of organizing transactions.”

The economy in general is this information system of telling people to invest here, buy that, because they’re telling you how much something is worth.

While auctions are intended to exploit competition, they promote fair competition when designed properly, according to Wilson.

“In many people’s minds, an auction is the standard for fairness,” he says. “The thing about an auction is it's a set of rules that can be applied in almost any circumstance. So if the participants show up, they know what to do, they can submit their bids or offers and we have a set of rules that resolve the transactions.”

The Theory of Auctions

How can auctions help to solve the winner's curse?

Wilson began looking for industries in which he saw an opportunity for auctions to solve for the inefficiency created by information asymmetry. A paper from the Harvard Business School that focused on oil exploration particularly piqued his interest. The Department of Interior in the United States had been using auctions for oil leases but the bidding system gave huge preference to the firms who had already drilled versus any newcomers looking to join the bid.

What is the winner’s curse and what was Wilson’s solution for it?

“I developed a model that gave an explanation of what we call the winner's curse,” says Wilson. “It’s one in which the bidder with the highest estimate of this value tends to be the one that wins it and if they don't recognize the bias in the fact that they overestimate, then they could lose money.”

His winner’s curse model led the Department of Interior to approach him for expert advice on how the auctions could be redesigned using game theory. Wilson focused on what is called a common value, something that is true for all parties. In this case, it was the price at which these companies could sell oil or gas. Their costs of drilling or extraction may differ based on equipment, staffing, and other factors, but Wilson isolated common elements that largely went unobserved during the bidding process.

“There are all these indirect means of estimation so you want a model that mixes together the fact that there are some what we call private factors,” he says. “There are idiosyncratic aspects and common factors that are unobserved and yet have to be estimated.”

Wilson’s work created a new rights model for oil, gas, and mineral exploration which became a standard model in parts of auction theory.

You want a model that mixes together private factors. There are idiosyncratic aspects and common factors that are unobserved and yet have to be estimated.

Oil Leases and the Winner’s Curse

How can auctions be used to improve the allocation of scarce resources?

The need for a new auction system for spectrum licenses

By the mid 1980s, Wilson had been working and collaborating with his mentee, Paul Milgrom, on auction design. It was also at this time that cell phones were gaining popularity. Yet, the adoption of this new technology was moving much slower in the United States compared to Europe and the underlying reason for this was how licenses were being allocated by the Federal Communications Commission (FCC). To give out radio spectrum licenses – which were the primary category before cell phone services were introduced – the FCC would hold comparative hearings between two hopeful providers and try to evaluate which would best serve the public interest. When the FCC started receiving hundreds of applications from firms looking to attain licenses to set up cell phone services, they couldn’t maintain the time consuming and legalistic process they had been using.

“Companies would say, ‘We could make the best use of the spectrum’ but you need a credible way of evaluating that,” says Wilson. “It’s very hard for a regulatory commission to evaluate the technical abilities of these cell phone providers because when this was going on, most people didn’t even know how cell phones worked. The companies themselves didn’t know how they would go about implementing cell phone service, by what technology, or by what standards.”

The FCC received approval from Congress to use a bidding system to allocate these licenses and accepted proposals for how this bidding structure could be implemented.

Wilson and Milgrom's proposal

“Of course, the proposals from the professional auctioneers were we could do this whole thing in a day. If you let us do it, we can sell a license every five minutes. Boom, boom, boom,” says Wilson. “And here the economists are saying, ‘No, we're going to take six months to sell these. We're going to make it move slowly. We're going to use a very elaborate auction design.’”

“Paul Milgrom and I worked together and our proposal is called a simultaneous ascending auction,” he continues. “So all these licenses would be auctioned simultaneously with ascending prices and a key feature was that the auction doesn't close until they all close. It was subject to another provision which is called the activity rule, which forces people to keep participating in a way that is consistent with some preferences. We call it a revealed preference to avoid a particular kind of strategy that can be colloquially called snake in the grass strategy. People have to express their willingness to pay early on.”

The FCC ultimately chose and implemented Wilson and Milgrom’s proposal, cementing their place amongst the world’s most influential economists.

The FCC Spectrum Auction

What is the secret to Wilson's success in mentoring economists?

Wilson was ultimately co-awarded the prize with Milgrom for their improvements to auction theory and inventions of new auction formats, but he also taught and mentored Alvin Roth and Bengt Holmström, who both went on to win the prize as well. When asked what he brings to the classroom that clearly inspires his students to follow closely in his footsteps, however, he is modest.

“I'm not a very good teacher in the classroom,” he claims. “With PhD students, though, I resonate better because I'm interested in ideas. PhD students are here just for research and ideas so we share this intellectual curiosity and that’s what I offer, a lot of intellectual curiosity. I’m interested in a very broad range of theoretical topics and for me, a lot of it is just being supportive to them and I get a lot of joy from it.”

“People sometimes ask me how it could be that I have had a succession of students that have had good success in their careers. And I think it's just a matter that we've had very good students come through and with good encouragement and stimulation, they're very productive.”

Whatever the truth may be, there is no denying the impact and influence that Wilson’s career has had on the field of economics overall, and on a long line of economists and Laureates he has helped inspire along the way.

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