Barry Nalebuff on the Economy and Game Theory

Question: How applicable is game theory today?

Barry Nalebuff: I do believe that game theory is the way of seeing the world and therefore, in some sense, applies to everything.

How much it gives you a new insight? Well, that depends on the circumstance.

I could take one example right now which is the crisis we’re seeing and the [US government's financial] bailout. And people are talking about using an auction as a way to buy a lot of the distressed debt. Auctions are great. On eBay you can buy a paste dispenser or a plane from the government of Alaska perhaps. But it turns out auctions work much better for selling things than for buying things.

So the standard auction we think about, you got the paste dispenser for sale and lots of people bidding cash. In this type of auction, you have to flip things, you would have the government paying cash and buying bonds. Now, normally these are called procurement auctions or reverse auctions. The challenge is that when you’re doing that, people are selling you stuff of different quality.

So if you are buying a road, for example, and you take the lowest bid, well, you might put enough specifications, so you think the different contractors are pretty similar. But if you said, I’ll give you 50 billion dollars and who will give me the most bonds? The people are going to give you those bonds and the ones with the worst ones. So you will end up with something called the winners curse; it will be a disaster.

So, while auctions work great for selling things, they really don’t work so well for buying things when the quality isn’t clear and that’s what we’ve got in this case.

So, I’d like to think that game theory, and this application to auctions, could help us from really screwing up in this circumstance.

Question: Is it possible to understand the financial crisis in terms of game theory?

Barry Nalebuff:  I would say it’s appreciating that people were thinking about a short-term game and imagining that there will be a sort of continuation.

For example, homeowners, when they took these mortgages with the teaser rates, and then they are going to have the 12% interest rate to come, they never expected they’re going to pay 12%.

And the banks, by the way, never expected that they’d get the 12%. The whole purpose of this was to force the person to refinance in three or four years when, hopefully, real estate prices will go up.

It’s a little bit like what happened with the auction securities market; that sort of the penalty rates. And their failure to really anticipate what would happen in the event that they couldn’t refinance, created a situation where there was no escape, and it got worse because those securities were chopped up into [buying out] of 20 pieces is a very complicated process, where one person gets paid first and another person gets paid second.

So you’ve got a homeowner who is willing to go ahead and pay some amount and not pay the 12% that nobody thought. But there’s nobody that we negotiate with because you’d have to get 20 different people’s agreements. And the problem is, anyone person says, well, excuse me, you need my agreement, you’ve got to pay me something for it. 

So what game theory says is, that when there are 20 people who all have to say yes to get something done, the chances of getting something done easily and quickly are pretty darn difficult.

Recorded on: Oct 2, 2008


Barry Nalebuff tells us how game theory can be applied to the economic crisis and where he sees the economy in the next few years.

To boost your self-esteem, write about chapters of your life

If you're lacking confidence and feel like you could benefit from an ego boost, try writing your life story.

Personal Growth

In truth, so much of what happens to us in life is random – we are pawns at the mercy of Lady Luck. To take ownership of our experiences and exert a feeling of control over our future, we tell stories about ourselves that weave meaning and continuity into our personal identity.

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Yale scientists restore brain function to 32 clinically dead pigs

Researchers hope the technology will further our understanding of the brain, but lawmakers may not be ready for the ethical challenges.

Still from John Stephenson's 1999 rendition of Animal Farm.
Surprising Science
  • Researchers at the Yale School of Medicine successfully restored some functions to pig brains that had been dead for hours.
  • They hope the technology will advance our understanding of the brain, potentially developing new treatments for debilitating diseases and disorders.
  • The research raises many ethical questions and puts to the test our current understanding of death.

The image of an undead brain coming back to live again is the stuff of science fiction. Not just any science fiction, specifically B-grade sci fi. What instantly springs to mind is the black-and-white horrors of films like Fiend Without a Face. Bad acting. Plastic monstrosities. Visible strings. And a spinal cord that, for some reason, is also a tentacle?

But like any good science fiction, it's only a matter of time before some manner of it seeps into our reality. This week's Nature published the findings of researchers who managed to restore function to pigs' brains that were clinically dead. At least, what we once thought of as dead.

What's dead may never die, it seems

The researchers did not hail from House Greyjoy — "What is dead may never die" — but came largely from the Yale School of Medicine. They connected 32 pig brains to a system called BrainEx. BrainEx is an artificial perfusion system — that is, a system that takes over the functions normally regulated by the organ. The pigs had been killed four hours earlier at a U.S. Department of Agriculture slaughterhouse; their brains completely removed from the skulls.

BrainEx pumped an experiment solution into the brain that essentially mimic blood flow. It brought oxygen and nutrients to the tissues, giving brain cells the resources to begin many normal functions. The cells began consuming and metabolizing sugars. The brains' immune systems kicked in. Neuron samples could carry an electrical signal. Some brain cells even responded to drugs.

The researchers have managed to keep some brains alive for up to 36 hours, and currently do not know if BrainEx can have sustained the brains longer. "It is conceivable we are just preventing the inevitable, and the brain won't be able to recover," said Nenad Sestan, Yale neuroscientist and the lead researcher.

As a control, other brains received either a fake solution or no solution at all. None revived brain activity and deteriorated as normal.

The researchers hope the technology can enhance our ability to study the brain and its cellular functions. One of the main avenues of such studies would be brain disorders and diseases. This could point the way to developing new of treatments for the likes of brain injuries, Alzheimer's, Huntington's, and neurodegenerative conditions.

"This is an extraordinary and very promising breakthrough for neuroscience. It immediately offers a much better model for studying the human brain, which is extraordinarily important, given the vast amount of human suffering from diseases of the mind [and] brain," Nita Farahany, the bioethicists at the Duke University School of Law who wrote the study's commentary, told National Geographic.

An ethical gray matter

Before anyone gets an Island of Dr. Moreau vibe, it's worth noting that the brains did not approach neural activity anywhere near consciousness.

The BrainEx solution contained chemicals that prevented neurons from firing. To be extra cautious, the researchers also monitored the brains for any such activity and were prepared to administer an anesthetic should they have seen signs of consciousness.

Even so, the research signals a massive debate to come regarding medical ethics and our definition of death.

Most countries define death, clinically speaking, as the irreversible loss of brain or circulatory function. This definition was already at odds with some folk- and value-centric understandings, but where do we go if it becomes possible to reverse clinical death with artificial perfusion?

"This is wild," Jonathan Moreno, a bioethicist at the University of Pennsylvania, told the New York Times. "If ever there was an issue that merited big public deliberation on the ethics of science and medicine, this is one."

One possible consequence involves organ donations. Some European countries require emergency responders to use a process that preserves organs when they cannot resuscitate a person. They continue to pump blood throughout the body, but use a "thoracic aortic occlusion balloon" to prevent that blood from reaching the brain.

The system is already controversial because it raises concerns about what caused the patient's death. But what happens when brain death becomes readily reversible? Stuart Younger, a bioethicist at Case Western Reserve University, told Nature that if BrainEx were to become widely available, it could shrink the pool of eligible donors.

"There's a potential conflict here between the interests of potential donors — who might not even be donors — and people who are waiting for organs," he said.

It will be a while before such experiments go anywhere near human subjects. A more immediate ethical question relates to how such experiments harm animal subjects.

Ethical review boards evaluate research protocols and can reject any that causes undue pain, suffering, or distress. Since dead animals feel no pain, suffer no trauma, they are typically approved as subjects. But how do such boards make a judgement regarding the suffering of a "cellularly active" brain? The distress of a partially alive brain?

The dilemma is unprecedented.

Setting new boundaries

Another science fiction story that comes to mind when discussing this story is, of course, Frankenstein. As Farahany told National Geographic: "It is definitely has [sic] a good science-fiction element to it, and it is restoring cellular function where we previously thought impossible. But to have Frankenstein, you need some degree of consciousness, some 'there' there. [The researchers] did not recover any form of consciousness in this study, and it is still unclear if we ever could. But we are one step closer to that possibility."

She's right. The researchers undertook their research for the betterment of humanity, and we may one day reap some unimaginable medical benefits from it. The ethical questions, however, remain as unsettling as the stories they remind us of.

Ashes of cat named Pikachu to be launched into space

A space memorial company plans to launch the ashes of "Pikachu," a well-loved Tabby, into space.

GoFundMe/Steve Munt
Culture & Religion
  • Steve Munt, Pikachu's owner, created a GoFundMe page to raise money for the mission.
  • If all goes according to plan, Pikachu will be the second cat to enter space, the first being a French feline named Felicette.
  • It might seem frivolous, but the cat-lovers commenting on Munt's GoFundMe page would likely disagree.
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