No fooling — games serious business

In a pioneering move, Kellogg embraced game theory and used the power of applied mathematics to solve business problems. The strategy changed the school

By Matt Golosinski

Call it a brainstorm.

In 1968, Northwestern University began building one of the most concentrated and talented analytical teams in academia. That it did so within a business school raised a few eyebrows.

Soon, though, the new Managerial Economics and Decision Sciences Department (MEDS), headed by Professor Stanley Reiter and colleagues like Morton Kamien, David Baron, Mark Satterthwaite and Nancy Schwartz, dispelled any skepticism as they created what some have called "arguably the best economic theory department in the world."

With its emphasis on mathematics, MEDS began to influence departments across the school, an approach that universally elevated performance and reputation. By the mid 1970s Kellogg was attracting more talent — game theorists who sought a predictive quantitative framework with which to view rational human behavior.

Game theory's origins date to the 1940s and the seminal work of John von Neumann and Oskar Morgenstern, and as a tool it remains vibrant today. Substitute "strategic interaction" for "games" and it's quickly apparent that such theory holds important implications for a range of relationships, including commerce. While most other business schools failed to appreciate game theory's potential, "Kellogg was, and continues to be, a most important player in this process," says Ehud Kalai, one of the figures responsible for the school's rise as a quantitative powerhouse.

The James J. O'Connor Distinguished Professor of Decision and Game Sciences and the founding editor of Games and Economic Behavior, a top journal in the field, Kalai joined the school in 1975, the year he and Tel Aviv University colleague Meir Smorodinsky produced a pathbreaking paper, "Other Solutions to Nash's Bargaining Problems." Kalai would advance his discipline's frontiers and its interface with economics, social choice, operations research and computer science. His work proved instrumental in opening and expanding the understanding of bargaining, strategic learning, large games and related subjects.

Professor Rakesh Vohra is among the younger generation of Kellogg scholars using game theoretic concepts.  Photo © Evanston Photographic Studios

"Game theory exploded onto the academic scene in the late 20th century," Kalai says. "Its revolutionary effect on economics was recognized by eight Nobel Prizes awarded to game theorists since the mid 1990s." (Many of those figures, incidentally, have spoken at Kellogg as part of the annual Nancy Schwartz Memorial Lecture.)

"We had the franchise in game theory," says Kamien, who hired Kalai. "Other schools missed the boat. Game theory started with tremendous promise as a fresh way of thinking."

Recalling his arrival at Northwestern, Kalai says that most faculty members had little formal game theoretical knowledge but were interested in "issues of incentives and in how to formally model them." Colleagues like Satterthwaite studied incentives for truthful voting, he says, while Kamien and Schwartz explored incentives to innovate in competitive markets. Ted Grove and John Ledyard, meanwhile, looked to solve the classic economic "free rider" problem, and Hugo Sonnenschein and John Roberts examined pricing and market competition. Others, like Roger Myerson, focused on mechanism design, or, like Robert Weber, researched the effects of private information in competitive settings.

"Game theory has the mathematical tools needed for addressing such questions," says Kalai, director of the Kellogg Center for Game Theory and Economic Behavior, noting that most business schools failed to realize its applicability. "Back then, though, it was viewed by others as abstract mathematics that was not useful to business school faculty, let along business school students or business executives. Kellogg was an exception."

The young economics researchers at Northwestern, Kalai says, were "not afraid of the math and were eager to find rigorous solutions to problems." Broader recognition of those researchers continues today; most notably, Myerson earned the 2007 Nobel Prize in economics for the groundbreaking work he conducted during his 25-year Kellogg tenure.

Kalai credits Reiter's leadership as director of the interdisciplinary Center for Mathematical Studies in Economics and Management Science (CMS-EMS) and Baron's skill as MEDS Department chair as key reasons why game theory thrived at Kellogg. An entrepreneurial dean, Donald P. Jacobs, was also essential then, just as Dean Dipak C. Jain's support today is vital as MEDS looks to build on its accomplishments.

Today, at least a dozen Kellogg MEDS professors list game theory among their specialties. Their research considers a range of related areas, including contract theory, mechanism design, informational economics, probability, and political economy. This diversity is not surprising, since Kalai notes that game theory's utility extends widely to include many disciplines, such as economics, computer science, networks, anthropology, philosophy and biology.

 "The 'game theory revolution' continues," he says. "And under the leadership of Dean Jain, the MEDS Department is a leader in advancing the integration of game theory into the MBA curriculum. Issues of incentives in supply chain management, in the design of political systems, computer networks, and learning and imitation are examples of exciting areas studied by today's MEDS faculty."

In other words: Let the games continue.

Next: Thinking strategically, Kellogg professors have transformed a discipline