In the early hours of Monday morning, Stanford economics professor Paul Milgrom received a surprise visit from his former mentor, colleague and neighbor, Stanford Graduate School of Business (GSB) management professor emeritus Robert Wilson and Wilson’s wife, Mary.
“Paul? It’s Bob Wilson. You’ve won the Nobel Prize.”
Milgrom and Wilson were jointly awarded the 2020 Nobel Prize in Economic Sciences — worth $10 million Swedish kronor (about $1.1 million USD) — on Monday for their work on auction theory and their invention of new auction formats, which the Royal Swedish Academy of Science said have “benefitted sellers, buyers and taxpayers around the world.”
Every day, astronomical amounts of money are exchanged between bidders and sellers through auctions. Wilson developed the theory for auctions of objects with a common value, like the volume of minerals in one mine, while Milgrom advanced the theory for auctions of complex objects with both common and private values.
“All of us at Stanford are so proud of Professor Wilson and Professor Milgrom, and we are delighted that their accomplishments have been recognized by the Nobel Committee,” said University President Marc Tessier-Lavigne at the Stanford Nobel Prize press conference.
Wilson and Milgrom became life-long collaborators after Wilson became Milgrom’s Ph.D. economics advisor at the GSB in the late 1970s. They are now the 18th and 19th living Nobel laureates among Stanford’s faculty, making Stanford home to 34 Nobel laureates.
“Their accomplishments are a shining example of the ways in which fundamental discovery, and its applications to finding real-world solutions, can make enormous contributions to modern society,” Tessier-Lavigne said.
Wilson teaches two courses, MGTECON 601: “Microeconomics Analysis II,” and MGTECON 608: “Multiperson Decision Theory,” at the GSB, while Milgrom is currently teaching various undergraduate courses at the School of Humanities and Sciences, including ECON 136: “Market Design.”
Journey to the Nobel Prize
Wilson told The Daily his introduction to economics was almost accidental. Although he took economics courses as an undergraduate and graduate student, he had never studied it formally.
While he was an assistant professor at Stanford, his interest in game theory led him to “take a year off to just live in the economics department and absorb some economics by just being there, talking to economists and reading economics.”
Milgrom also did not have a formal background in economics, and was introduced to auction theory by Wilson as his Ph.D. student at the GSB.
At the time the two started to work together, game theory did not have a large role in economics compared to the traditional way of analyzing markets using supply and demand and theories about monopoly and oligopoly, according to Milgrom.
“It was really the game theoretic perspective that changed things for us personally, but that also changed the field of economics,” Wilson said.
Milgrom recounted one challenge he overcame in the course of their Nobel-winning work, that he felt particularly proud of: he convinced the Federal Communications Commission (FCC) to use a novel auction he and Wilson designed in 1993.
“Other people were saying, ‘No it’s too complicated. It would never work. You could never do that,’” he said.
But a young man, Zoran Crnja, who worked for Milgrom at the time, was convinced that he could write a simple version of the program on an Excel spreadsheet. Milgrom explained that Pacific Bell, their client, did not want to pay for it, so he went to Washington to hand the disks to Evan Kwerel, a senior economist at the FCC’s Office of Plans and Policy himself, proving to the FCC team that it was possible.
“This is a very risky, speculative activity that Paul took,” Wilson said. “He had to be bold and clinch the deal.”
Wilson and Milgrom’s ground-breaking discoveries in auction theory and design have had implications on a wide range of real-world problems.
The novel Simultaneous Multiple Round Auction (SMRA) and incentive auction formats led by Wilson and Paul have helped the Federal Communications Commission raise over $60 billion for the U.S. Treasury.
Milgrom and Wilson’s work on auctions has also helped the Environmental Protection Agency reduce annual sulfur dioxide (SO2) emissions by over 93% through acid rain pollution allowance auctions.
The pair’s influential work has had impacts abroad as well. OECD Development Co-operation Directorate director Jorge Moreira da Silva told The Daily that the European Union’s cap-and-trade system, based on auction theory, has “proven to be very successful.”
“The system covers 50% of all emissions in the EU and has strongly reduced the cost of compliance of Kyoto and Paris,” Moreira da Silva wrote, referring to international climate agreements. “My hope is that one day we will have several comparable and interlinked systems in the world.”
Now, the two are setting their sights on novel projects. Wilson said at the press conference that he is currently working on how personal protective equipment (PPE) allocation could have been more efficient for medical workers during the COVID-19 pandemic, stating that “major improvements” could be made in regards to allocating scarce supplies during the next emergency.
Milgrom is the co-founder and Board of Directors Chairman of Auctionomics, an auction consulting and software firm that does advising for bidders and market design.
‘Great scholar, great advisor, great mentor‘
Outside of their economics work, Wilson and Milgrom have served as influential mentors and scholars in their field.
Wilson has now mentored three students who have won the Nobel Prize in economics: Stanford economics professor Alvin Roth in 2012, Massachusetts Institute of Technology (MIT) economics professor Bengt Holmström in 2016 and now Milgrom.
Bob Wilson (second from right) being celebrated for winning the CME Group-MSRI Prize in Innovative Quantitative Applications, next to his students Alvin Roth (left), Paul Milgrom (second from left), and Bengt Holmström (right), all Nobel Prize winners in economics (Photo courtesy of Alvin Roth)
“I’ve been successful because I’ve had these three brilliant students, so they may have gained something from me, but they’re all so talented,” Wilson said.
GSB economics professor Yuliy Sannikov Ph.D. ’94, who was Wilson’s Ph.D. student, said Wilson’s approach to research was what made him great.
“Seeing how Bob thinks — through images, pictures, relationships — it was very high-level and not always precise, but it was exactly how a researcher needs to think,” Sannikov said. “If you focus on the trees, sometimes you don’t see the forest, and you don’t see the end goal.”
Yunus Aybas, a third-year economics Ph.D. student who took a seminar class with Wilson, approached Wilson for advice on his research project, calling him a “living legend” in the field of game theory. Months after Aybas presented, Wilson still sends him related papers and connects him with people working on similar ideas.
Students also praised Milgrom as an advisor and mentor.
“[Milgrom] treats his students both as colleagues and extended family,” said Mitch Watt, third-year economics Ph.D. student and current research and teaching assistant for Milgrom. “Even though we’re still learning to become economists, he treats our ideas with respect and helps us refine them.”
Before the pandemic, it was common for Milgrom to host graduate students for dinners at his home, where students would present their recent work and discuss ideas over dinner, Watt said.
“I feel like I finally got the formula after 10 years or so of doing it, what it took to create the right kind of environment so the students could thrive together,” Milgrom said regarding the dinners. “And they are thriving, and I’m really hopeful that I’m going to show some of the same kind of success Bob has — we’ll see.”
Stanford faculty also praised the pair for their passion about their research. GSB Dean Jonathan Levin said at the press conference that for Wilson and Milgrom, “even with all their years of accomplishments, it is always today’s work that is most exciting and energizing.”
“Like many economists, I have looked to Bob and Paul as a model of what it means to be a great scholar, a great advisor and a great mentor,” Levin said.
GSB economics professor Susan Athey Ph.D. ’95, who was the first woman to win the John Bates Clark Medal, wrote in a statement to The Daily that the two “love their work and take joy in all that they do, and they are constantly learning new things.”
She said Milgrom’s view of her potential was much higher than what she saw in herself, adding that she was criticized for her choices at every stage of her career from when she started out at the early age of 24, but that Milgrom, her Ph.D. advisor, “always made it clear that he valued [her] work and respected [her] choices.”
Athey stated that Milgrom has led in promoting gender diversity in a variety of situations.
“Among our students right now, Paul and I have brilliant young women,” Wilson said, citing recent female Nobel Prize winners in economics as evidence of increasing gender equality in the field. “When Paul was a student, I had zero women among my students. Now, half or at least half of them are women, and they are very talented.”
“So what you will find out is that the Nobel Prize winners 30 years from now will be women,” Wilson predicted.
Contact Denise Hui Jean Lee at deniselj ‘at’ stanford.edu.