Last year was a year of celebrity deaths. But perhaps the most significant of all received very little coverage. Just before Christmas, Thomas Schelling, Nobel Laureate in economics, died aged 95.
In the early, tense years of the Cold War between America and the Soviet Union in the late 1940s and 1950s, Schelling’s ideas were enormously influential in preventing nuclear conflict from breaking out. As he pointed out in his Nobel Prize lecture, there was a real danger of this.
The US government invested heavily in the then new science of game theory. How do you handle a weapon which is so devastating you do not want to use it, while at the same time convincing the other side that you might? Schelling was instrumental in creating the strategy of credible threats.
But his mind ranged powerfully over a wide range of disparate issues. Our understanding of crime, obesity, smoking, binge drinking – a whole host of social problems – has been improved substantially by Schelling’s work. He saw that there are underlying similarities in how they develop.
His most important work in this area was published in 1973, in a paper with the fantastic title “Hockey helmets, concealed weapons and daylight saving”. Schelling’s inspiration was a piece in the sports section of a newspaper about ice hockey, a game even more brutal than Rugby League.
A star player had suffered serious head injuries from the flying puck while not wearing a helmet. The reporter interviewed other leading players, none of whom wore helmets. It was clear that they understood the very real dangers involved. A rational economic person, weighing up the costs and benefits, would always wear a helmet. But when asked why he didn’t, a top boy answered “I don’t because the other guys don’t”.
Schelling crystallised this into a mathematical concept he called “binary choice with externalities”. The choice facing an individual is binary. Either you wear a helmet or you don’t. Either you smoke or you don’t. But your choice may affect how other people in your peer group make their choices.
If no one else wears a helmet, you look soft by wearing one. If all your friends smoke, you may do so just to fit in. So the decision of an individual can have effects which are “external” to the decision itself. Understanding this is crucial to policy-makers trying to influence the outcome. Rational choice theory may not always apply.
His ideas on game theory live on. Indeed, they appear to have influenced President-Elect Trump. Trump has sent out many signs that he wants to work with Putin’s Russia. But just before Christmas, he tweeted, inexplicably to many, that America should expand its nuclear arsenal. He was in fact making a credible threat. Putin, an ex-KGB man, knew that it was Reagan ratcheting up defence spending which finally broke the old Soviet Union. So Trump signals in a single tweet: we want to cooperate, but if you don’t, your economy will collapse as you try to keep up with us.
Thomas Schelling, polymath of genius, I salute you!
Paul Ormerod
As published in CITY AM on Wednesday 4th January
Image: Bomb by _Gavroche_ is licensed under CC BY 2.0
