- Person
- Reinhard Selten
- Lived
- 1930–2016
- Field
- Game theory
- From
- German
The story
Reinhard Selten was born in Breslau in 1930 to a Jewish father, a blind bookseller forced by Nazi law to sell his business, and a Protestant mother. As a “half-Jewish” boy he was pushed out of high school at fourteen and barred from learning a trade, and in 1945 his family fled the city on one of the last trains. He went on to study mathematics in Frankfurt, where he became fascinated by game theory and began running some of the first laboratory experiments in economics.
Game theory predicts outcomes using the Nash equilibrium, a situation in which no player can do better by changing strategy alone. But many games have several Nash equilibria, and some rest on threats that would never actually be carried out. Studying a model of a market with a few competing firms, Selten found that the mathematics allowed many such implausible solutions. In a 1965 paper he defined subgame perfection: a strategy must make sense not only at the start but at every later stage of the game, including stages that are never reached.
The Nobel committee illustrated the idea with a monopolist who threatens a price war if a rival enters. If the rival believes the threat, it stays out, and the threat costs nothing. But if a price war would hurt the monopolist badly, it would not fight once the rival had actually entered, so the threat is not credible. Subgame perfection discards such equilibria. In 1975 Selten added a further refinement, trembling-hand perfection, which requires strategies to stay sensible even when players occasionally make small mistakes.
Awarding him the 1994 prize with John Harsanyi and John Nash, the committee called subgame perfection the most fundamental refinement of Nash equilibrium and said it bore directly on credibility in economic policy, on markets with few sellers and on the economics of information. Economists use it to judge whether a dominant firm can really deter competitors, why central banks need credible commitments and how negotiations and deterrence work.
Why it matters
Selten’s test of credibility helps competition authorities, central banks and negotiators separate real threats and promises from empty ones.
About Reinhard Selten
Breslau-born game theorist, persecuted as half-Jewish under the Nazis, who showed how to rule out empty threats in strategic models and helped found experimental economics. Nobel 1994.
Sources
- Press release: The Prize in Economics 1994 NobelPrize.org
- Reinhard Selten, Biographical NobelPrize.org
- Prof. em. Dr. Dr. h. c. mult. Reinhard Selten BonnEconLab, University of Bonn
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.