Leonid Hurwicz lives on the sixth floor of an assisted-living complex in south Minneapolis with Evelyn, his wife of 63 years. He is hard of hearing, and requires dialysis twice a week. Today, he is dressed in gray sweatpants, a crisp cotton shirt, and a sport coat, weighing perhaps 120 pounds. Inside his and Evelyn’s double apartment, he shuffles among tall piles of books and files, childhood photos of his four children (now ranging in age from 54 to 61), a menorah, and prints and tapestries from the old country—Poland.
“The way I describe it is, there are two kinds of games in economics,” Hurwicz says. He inches his chair closer to the dining room table—which takes a full minute—and leans in like someone confiding a secret. At the age of 90, his voice is full of gravel and softness. “One is the game where people use only legal moves. Then there is the true game, the one like real life, where the strategies and moves people make, some of them contain illegal gains. So you take into account when you write the rules of the game that the players will try to cheat.”
That’s the basis of “mechanism design,” for which Hurwicz (pronounced “HER-witch”), a University of Minnesota regents professor emeritus of economics, won the 2007 Nobel Prize in economics. Too frail to make the trip to Sweden, Hurwicz received the award from the Swedish ambassador to the United States in the university’s Ted Mann Concert Hall on December 10.
Mechanism design builds on game theory, which arose in the 1940s as a mathematical means of studying various interactions, including business negotiations and transactions. According to game theory, each “player” in an exchange will choose a strategy to better his own position based on the strategies that he believes others will employ. (Think of a blind auction: How do you bid on something so that you win the item but don’t pay too much for it?)
In business, there are many examples of “games” in which one player can increase his odds of winning by being less than up front. What Hurwicz did—along with Eric Maskin at Princeton and Roger Myerson at the University of Chicago, who both share the Nobel Prize with him—was invent a mathematical way to assess the effects of dishonesty or other imperfections and prevent a zero-sum game in which dishonest winners turn other players into undeserving losers. Since imperfect results can occur in the free market—monopoly power, hidden information (Enron’s off-the-books funds, for instance), pollution, disincentives to make product improvements—Hurwicz and his colleagues wondered, How can regulators (or other players) create incentives so that everyone wins and the efficiencies of a market economy aren’t lost?
“Leo’s research provided a way to categorize all the outcomes that are achievable in different economic settings,” says Narayana Kocherlakota, chair of the Department of Economics at the University of Minnesota. “He understood that people might not abide by the rules and thought about all the possible games and arrangements and policies that could result. The way economists worldwide think through problems is heavily influenced by Leo’s thinking even today.”
