The models for market design and matching theory were developed by Lloyd Shapley and Alvin Roth, two American economists who were awarded the Nobel Prize in economics this week for their work. While their work may not directly address the turmoil of the world markets today, it does have life-altering results for humanity.
Shapley, a professor emeritus at UCLA, developed a theory of "matching methods," for how to match people in large groups efficiently, such as students choosing schools and men and women looking to get married. The goal of his research was to ensure that the system remained stable, meaning that both parties felt they had gotten the best possible match. Otherwise, one of the parties might separate in search of a better match.
Lloyd Shapley and his colleague David Gale developed a process to ensure that matches between large groups would be as stable as possible. The process become known as the "Gale-Shapley Algorithm" and consisted of a series of rounds in which men and women rank potential mates and matches are made until everyone finds a spouse and the system is stable. The work however was purely theoretical.
Years later Alvin Roth, at the time a visiting professor at Stanford University, developed a way to apply Shapley's work. The first application was in a system used to match new medical residents with hospitals that wished to employ them.
Professor Roth noticed that matching an employer and an employee was similar to the hypothetical husband and wife match-up Shapley used to explain his theory. With this realization he assisted the resident matching program in adapting its method to deal with couples who wished to ensure that they be hired by hospitals in the same city and reduce the possibility of participants successfully gaming the system.
Professor Roth then tackled the problem of the New York City school placement system. The old system required students to list their school preference, but the system was prone to manipulation as less-qualified students could improve their chances of admittance to a particular school by attributing a higher value to going to the school than they felt it deserved.
Re-vamping the school's system required the professor to apply the lessons he learned from the resident matching program as well as the theoretical work by Professor Shapley. The result of his efforts was a 90 percent reduction in the number of students assigned to school for which they had no preference.
In announcing the award the Nobel committee said, "The combination of Shapley’s basic theory and Roth’s empirical investigations, experiments, and practical design has generated a flourishing field of research and improved the performance of many markets."