- Person
- John Harsanyi
- Lived
- 1920–2000
- Field
- Game theory
- From
- Hungarian-American
The story
John Harsanyi was born in Budapest in 1920 to parents of Jewish origin who had converted to Catholicism shortly before his birth. Under Hungary’s anti-Jewish laws he was treated as a Jew: he chose to study pharmacy to avoid a forced labour unit, was nonetheless conscripted into one in 1944, and escaped from a Budapest railway station just before his unit was deported to a concentration camp in Austria. In 1950 he fled Communist Hungary, worked in Australian factories while studying economics at night, and later earned a PhD at Stanford under Kenneth Arrow.
Game theory, developed by John von Neumann and John Nash, analyses situations in which each person’s best move depends on what others do. But its equilibrium concepts assumed that all players know each other’s goals and payoffs. Real life is full of secrets: a seller knows more about his product than the buyer, a bidder does not know rivals’ valuations, a regulator does not know a firm’s true costs. No one knew how to analyse such games.
In a three-part paper published in Management Science in 1967 and 1968, Harsanyi showed how. He described each player as one of several possible “types”, each with its own preferences and beliefs, and imagined that a fictional first move by Nature assigns types according to probabilities that everyone knows, with each player seeing only his own. This transforms a game of incomplete information into an equivalent game that standard methods can solve. The Nobel committee, which awarded him the 1994 prize with Nash and Reinhard Selten, said his approach could be viewed as the foundation for nearly all economic analysis involving information.
Bayesian games are now the standard model for auctions, insurance, contracts, bargaining, regulation and central bank credibility. They underpin the theory used to design the auctions in which governments sell spectrum licenses and bonds, and the incentive schemes that let regulators and companies deal with information they cannot directly observe.
Why it matters
Harsanyi’s method for analysing situations with hidden information underlies the design of auctions, contracts, insurance and regulation that affect markets everywhere.
About John Harsanyi
Budapest-born game theorist who escaped a Nazi deportation train, fled Communist Hungary and showed how to analyse strategic situations in which people hold private information. Nobel 1994.
Sources
- Press release: The Prize in Economics 1994 NobelPrize.org
- John C. Harsanyi, Biographical NobelPrize.org
- John Harsanyi Jewish Virtual Library
- John Harsanyi Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.