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In contrast, microeconomics demands modesty and points to the limitations of human information processing. Selfishness is not a complementary attribute and whilst to be biased may make the human being also more likable, there can be no doubt that its judgment is regularly surpassed by the cold application of mathematical models. Not only in chess human reasoning lost out confronted with the sheer computing power of machines, from clinical assessment in psychiatry to investment decisions at the stock exchanges, mathematical models have superseded what was perceived before as human ingenuity. In addition, experimental microeconomics elucidated what had been well known but was never modeled in this clear cut form, namely that many situations are structurally a dilemma. Sadly enough every action incurs inevitably opportunity costs, but, beyond that, many social interactions have a formal structure which in the end does not allow anybody to become a winner. Many of these games coming close to the heart of modern humankind, for example gaining social justice or achieving ecological conservation, cannot be won by one of the participating parties, but require compromises based on overcoming selfish interests. Of course, their compromising nature makes the pursuit of understanding such dilemma less likely to gain positive popular attention than win-win situations. Also the work by Roth and Shapley displays this dual nature of microeconomics. They developed an allocation algorithm which can be applied in many situations where goods cannot or should not be distributed over their prizing. The most prominent application is the mating game and you can playfully approach the algorithm in a simulation provided by the Mathlab from the University of California in Berkeley. The algorithm has proved its practical value allocating scarce goods like donated organs or sought for places to study at universities in a fair manner. However, whilst the best stable solution for all participants is achieved, not everybodys preferences can be completely satisfied. Evidently, solutions for such microeconomic problems help to solve problems concerning many individuals in a society. Macroeconomics is the result of the microeconomic universe and the success of macroeconomic interventions depends on regular considerations at a microeconomic level. The actual effect of a tax reduction to increase spending depends in fact on the willingness of the households to spend the money and not put it in a savings account. Candidate rankings indicate that several more Nobel Prizes for researchers in microeconomics are in the pipeline. The work of Roth and Shapley demonstrates that results do not necessarily have to be fascinating although a bit sobering insights into human nature only. Beyond such insight and explanations microeconomics can also provide useful tools and instruments. Thereby it will continue to take away illusions of control on some levels of human action, but also may give some more real control on other ones. Jon Elster from Columbia University titled an influential paper many years ago The sadder, the wiser. In fact, progress in economics and social welfare does not depend on the illusionary control of problems but on the wisdom to really cope with them. Analytically life can often be reduced to and viewed as just a game, but it is also much more than that.
Alvin E. Roth (Website) www.managing-essentials.com/2ly
Managing Essentials
International
Lloyd S. Shapley (Website) www.managing-essentials.com/2lz Profile: Lloyd Shapley and Alvin Roth (Laurence Knight) www.managing-essentials.com/2l1 Luce, R. D. & Raiffa H. (1957). Games and decisions: Introduction and critical survey. New York: Wiley. Flash demonstration of the mating game at the University of California at Berkeley www.managing-essentials.com/2l2 Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Straus and Giroux Elster, J. (1985). Sadder but wiser? Rationality and the emotions. Social Science Information June 1985 24: 375-406.