Bypass Chapter Navigation
Contents  
Foreword by Walter Cronkite  
Introduction - The National Science Foundation at 50: Where Discoveries Begin, by Rita Colwell  
Internet: Changing the Way we Communicate  
Advanced Materials: The Stuff Dreams are Made of  
Education: Lessons about Learning  
Manufacturing: The Forms of Things Unknown  
Arabidopsis: Map-makers of the Plant Kingdom  
Decision Sciences: How the Game is Played
Visualization: A Way to See the Unseen  
Environment: Taking the Long View  
Astronomy: Exploring the Expanding Universe  
Science on the Edge: Arctic and Antarctic Discoveries  
Disaster & Hazard Mitigation  
About the Photographs  
Acknowledgments  
About the NSF  
Chapter Index  
Decision Sciences: How the Game is Played
 

Practical Payoffs

From a financial standpoint, the big payoff for NSF's long-standing support came in 1995. The Federal Communications Commission (FCC) established a system for using auctions to allocate bands of the electromagnetic spectrum for a new generation of wireless devices that included cellular phones, pagers, and hand-held computers with email capabilities.

Instead of the standard sealed-bid auction, Stanford University game theorist Paul Milgrom, an NSF grantee, recommended open bidding, which allows each bidder to see what the others are offering. Participants could also bid simultaneously on licenses in the fifty-one zones established by the FCC. Game theory's models of move and countermove predicted that open bidding would reassure bidders who, in trying to avoid the so-called winner's curse of overpaying, might be excessively cautious. Open bidding would also enable bidders to carry out economically advantageous strategies to consolidate holdings in adjacent territories, although FCC rules guaranteed that no one could obtain a monopoly in any zone. The intended outcome was an optimal solution for all parties. The bidders would get as many licenses as they were willing to pay for, while the U.S. Treasury would earn the maximum possible.

In the final accounting, the FCC's 1995 simultaneous multiple-round auctions raised over $7 billion, setting a new record for the sale of public property. Not only was the decision a landmark in the recovery of private compensation for use of a public resource, it also represented a victory for the field of game theory, whose leading scholars had applied what they knew about strategic decision making in recommending an auction design to the FCC.

Game theory has proved its worth in many other practical areas, among them management planning. Alvin E. Roth of the University of Pittsburgh applied game theory to analyze and recommend matching mechanisms for allocating thousands of medical interns among hundreds of hospitals in such a way as to give both the hospitals and the interns the matches they favor the most. He had the broader research aim of understanding how market institutions evolved to determine the distribution of doctors and lawyers.

 
     
PDF Version
Overview
Decisions,Decisions
NSF Lends Support
Into the Laboratory
Practical Payoffs
Polls, Markets, and Allocations
Real-World Decision Making
Questioning Utility Theory
Why We Make Foolish Decisions
The Fruits of Economic Research Are Everywhere
All in a Day's Work
To Learn More...
 

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