Published: 16 Oct 2007
Last Updated: 31 Aug 2010
The three eminent profs share the $1.57m prize for their work on Mechanism Design Theory, a forty-plus year investigation into the age old problem of why markets don’t always work as efficiently as they can and should.
As usual, it’s all our own fault. Markets would operate a lot more effectively a lot more of the time, say the prize-winning trio, if only people were genuinely rational and didn’t let messy, unpredictable human behaviour interfere with all those nice, neat theoretical advantages.
One of the big problems, they add, is the issue of private information spoiling a trade. That is to say, sellers are not frank with buyers about pricing, and vice versa. It might seem like basic common sense not to divulge what negotiators call your fall-back position straight away, but beware. Irrationally sticking out for £200 when you are really prepared to take £150 could stop you selling to a buyer whose upper limit is £170.
What they propose instead – and which has been hugely influential in all kinds of deals from the UK 3G license auctions which netted billions for the treasury in 2000, through to government healthcare interventions and even the regulation of markets like subscription TV – are auctions. Specifically ‘optimally designed’ auctions where everyone involved is incentivised to reduce the ‘information gap’ between buyers and sellers.
In other words, don’t haggle – which is where we came in. The desire to drive a hard bargain is so deeply engrained in business cultures all over the globe that it’s very hard to imagine that the art of negotiation will ever die. The alternatives might be more efficient, but they don’t sound like much fun. And if the world’s great dealmakers – from London’s Square Mile to the Souks of Marrakech – stop enjoying their work, then we really will be in trouble.
As usual, it’s all our own fault. Markets would operate a lot more effectively a lot more of the time, say the prize-winning trio, if only people were genuinely rational and didn’t let messy, unpredictable human behaviour interfere with all those nice, neat theoretical advantages.
One of the big problems, they add, is the issue of private information spoiling a trade. That is to say, sellers are not frank with buyers about pricing, and vice versa. It might seem like basic common sense not to divulge what negotiators call your fall-back position straight away, but beware. Irrationally sticking out for £200 when you are really prepared to take £150 could stop you selling to a buyer whose upper limit is £170.
What they propose instead – and which has been hugely influential in all kinds of deals from the UK 3G license auctions which netted billions for the treasury in 2000, through to government healthcare interventions and even the regulation of markets like subscription TV – are auctions. Specifically ‘optimally designed’ auctions where everyone involved is incentivised to reduce the ‘information gap’ between buyers and sellers.
In other words, don’t haggle – which is where we came in. The desire to drive a hard bargain is so deeply engrained in business cultures all over the globe that it’s very hard to imagine that the art of negotiation will ever die. The alternatives might be more efficient, but they don’t sound like much fun. And if the world’s great dealmakers – from London’s Square Mile to the Souks of Marrakech – stop enjoying their work, then we really will be in trouble.
