GAMES INVADE ECONOMICS

In his 1928 paper, von Neumann did not attempt to do economics9—it was strictly math, proving a theorem about strategic games. Only years later did he merge game theory with economics, with the assistance of an economist named Oskar Morgenstern.

Morgenstern, born in Germany in 1902, taught economics at the University of Vienna from 1929 to 1938. In a book published in 1928, the same year as von Neumann’s minimax paper, Morgenstern discussed problems of economic forecasting. A particular point he addressed was the “influence of predictions on predicted events.” This, Morgenstern knew, was a problem peculiar to the social sciences, including economics. When a chemist predicts how molecules will react in a test tube, the molecules are oblivious. They do what they do the same way whether a chemist correctly predicts it or not. But in the social sciences, people display much more independence than molecules do. In particular, if people know what you’re predicting they will do, they might do something else just to annoy you. More realistically, some people might learn of a prediction and try to turn that foreknowledge to their advantage, upsetting the conditions that led to the prediction and so throwing random factors into the outcome. (By the way, in the Foundation Trilogy, that’s why Seldon’s Plan had to be so secret. It wouldn’t work if anybody knew what it was.)

Anyway, Morgenstern illustrated the problem with a scenario from The Adventures of Sherlock Holmes. In the story The Final Problem, Holmes was attempting to elude Professor Moriarty while traveling from London to Paris. It wasn’t obvious that Holmes could simply outthink Moriarty. Moriarty might anticipate what Holmes was thinking. But then Holmes could anticipate Moriarty’s anticipation, and so on: I think that he thinks that I think that he thinks, ad infinitum, or at least nauseum.10 Consequently, Morgenstern concluded, the situation called for strategy. He returned to the Holmes–Moriarty issue in a 1935 paper exploring the paradoxes of perfect future knowledge.

At that time, after a lecture on these issues, a mathematician



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