In 2012 Alvin E. Roth received a Nobel prize in economics for his book “Who Gets What — and Why: The new economics of matchmaking and market design.” Alvin Roth is a professor of economics at the University of Stanford. His new book described a new model of market relations in which money doesn’t matter. He called it the economics of matchmaking.
The first person to describe anything remotely similar was John Nash in his theory later called the Nash equilibrium.
Alvin Roth develops experimental economics, works on market design and focuses on solving real-life problems using economic theories. This summary covers ideas from the book on how two-sided matchmaking is involved in the choice of an educational institution, job, spouse and even has its place in the world of organ transplantation. The book is an engaging exploration of many fascinating stories, like the origins of the Oklahoma Sooners nickname and the role repugnance plays in market design.
We already written several book reviews and usually try to follow a particular pattern. Here though we give a book outline first, then followed by the Review section.
- Book Summary
- Market with no money? What do you mean?
- Supply and demand got to be even in such markets. So how can a choice be a problem?
- How an economist managed to influence the medical field
- Does the number of matching markets increase? How matching markets influence commodity markets?
- What’s a “market design”? It sounds odd for an economic term.
- Summary of Who gets what and why
Market with no money? What do you mean?
Markets that are defined by demand, supply and price in the equivalent of currency, called commodities markets. Markets that involve demand and supply, but limited by the quality of its judicious selection rather than price, Roth calls matching markets or markets of matchmaking.
A product in matching markets can be a step up a professional ladder, an admission to university or a young specialist, who’s in demand by several companies. Sometimes it’s a donor organ awaited by its recipient.
As an example, Alvin Roth points at the school admission system in New York City and Boston. It only allowed a few students to go to school they wanted.
The choice students had was severely limited and didn’t allow for proper matching. Here’s why.
- First, their parents got a list of all schools via mail and needed to mark the best schools in their opinion.
- Then they sent this list back. A goal was to pick the best school, and school always aims to get a loyal student. Each school prioritizes selecting only those who considered it to be the best.
- As a result, the school of student’s choice becomes, over-demanded and extra students reallocated to other schools. The right matching doesn’t happen.
Money has no value in this case.
Matching markets are also defined by a behavior pattern that is similar to seeking a partner — search and attention. In the end, a pair has to match. Universities seek promising students, school graduates look for a prestigious education institution, companies look for reliable and profitable workers, and vice versa. Matchmaking in these pairs is not a primitive act of sale or acquisition — it’s a conscious choice.
Supply and demand got to be even in such markets. So how can a choice be a problem?
Well, a lot of case studies showed that supply and demand are not even. Say, a person needs a kidney transplant. His relative (or a friend) sacrifices one. Demand equals supply. But if the kidney is not suitable for transplantation, a steady match cannot occur. From that point on, matchmaking makes no sense until you provide a choice. In general, demand for organ donation is way higher than supply: about 100,000 people are on the waiting list, but the number of donors is way less.
Also worth noting that a kidney has a buying price and, surprisingly, a higher price may even attract more willing recipients.
In cooperation with his students, Alvin Roth developed an algorithm, that allowed to expand possibilities for kidney transplantation. It helped save many lives and increase the efficiency of the pre-transplantation process.
How an economist managed to influence the medical field
Game theory studies strategic decisions — decisions that are dependent on other people. In couple “A” a woman faces kidney failure. Her husband is ready to give his kidney. The kidney doesn’t match.
Meanwhile, the couple “B” faces the same problem and the corresponding matching issue. If kidneys from couples A and B cross-match it benefits both women. If both couples make a simultaneous decision of exchange, both women can be saved. This story took place at Rhode Island hospital.
Such a transplantation cycle is called a two-pair kidney exchange or “New Program for Kidney Exchange” (NEPKE). Information coordination centers created with Roth’s assistance help setting up three-pair exchange cycles. In April of 2008, the first six-pair exchange with a total of 12 simultaneous surgeries (six donors, six recipients) was performed. Organ transplantation is synchronous so that no one changes his mind before the deal is through. Such is the design of the transplantation market — the most complex and dramatic of all markets present, which helps people overcome kidney disease.
Does the number of matching markets increase? How matching markets influence commodity markets?
Matching markets emerge and dissolve, like any others. The influence on commodity markets is present but also indirect. It is more about the specifics of design. The commodity market design is based on matchmaking too.
As an example of his methods on commodity markets, Roth mentions Airbnb — a service competing with hotels. Its lower price range was an upside, but an inability to book an apartment quickly enough was a downside. That was a matchmaking problem of connecting two people and letting them make decisions efficiently. At first, you could only book apartments at Airbnb via a personal computer, unlike with hotel rooms, where you had multiple options like a phone call or direct booking. When smartphones came to play, the game changed and now Airbnb is just as fast, efficient and convenient.
Uber made ordering a cab more accessible than ever. You can choose between the Uber car and general taxi. Uber solved a problem of the inability to evaluate the quality of a given alternative instantly. Uber made “driver-passenger” matchmaking way easier.
Roth compares markets to bridges. A bridge must be broad and convenient, allowing all participants to move without obstructing each other’s way. Any limitation in the free market environment leads to obstruction and failure.
What’s a “market design”? It sounds odd for an economic term.
It is a set of rules which regulate the market without money. It’s a new way of economic planning: design prevents the market from unraveling. There is good and bad market design.
What is unraveling? When one side of the pair has troubles coordinating the timing of transactions it leads to unraveling. Unraveling happens instead of matching because someone is in a hurry.
Roth gives a bunch of examples of unraveling.
- When a university offers a guaranteed spot to promising school football player if he joins its football team on admission, it can lead to unraveling. Why? The high school student is roughly 14 years old, and you can not be sure if he stays in the sport and if he decides to continue his education at all. But the spot is reserved regardless of his future decisions and circumstances.
- Marriage market unraveling: in some countries parents still, bestow their children in marriage even before they are born. It inevitably leads to conflicts and unraveling in the future.
- Labor-market unraveling: right before the financial crisis of 2008 happened, companies interviewed promising students, who were around a year or two away from graduation, and offered them guaranteed good positions. Pretty soon the crisis changed it all: specialists were left unemployed, companies left without competent specialists.
Every offer made too soon and burdened by responsibilities and promises is an excellent example of unraveling. It will eventually lead to chaos on the market, and that’s why you need “market design.”
How market design manages to unravel?
With the help of matchmaking, of course.
Market design is all about building and accumulating consecutive matches. It also sorts of labor relations in order. Let’s take a look at standard practice in the USA. A medical student is interviewed to get a medical residency, while he is still years away from the finish line. As a result, a clinic can get an inexperienced specialist, while a student can find himself in a position he couldn’t wish less for. Roth described it through an example of gastroenterology fellowships, which are the educational step after internal-medicine residency.
Coordination centers, which use Roth’s method establish matchmaking at later stages to make sure supply and demand are equal.
Do I need to have a degree in economics?
Alvin Roth is a Nobel laureate whose goal was to present economics as an accessible tool for people to solve everyday problems. The book is free of dull theories and full of practical advice and examples. The author’s method can be applied to many aspects of life.
Unlike classical economists, Roth doesn’t perceive any market similar to natural occurrences — like an uncontrollable and constant environment. He insists that you can, and you need to interfere with market activity, and it is vital for economists to become engineers adjusting markets to solve modern problems.
“Markets unravel despite the mutual benefit of having a crowded market in which lots of people are present at the same time, with many opportunities to be considered and compared. Without a good market design, individual participants may still find it profitable to go a little early and engage in a kind of claim jumping. That’s why self-control is not a solution: you can control only yourself, and if others jump ahead of you, it might be in your self-interest to respond in kind.”
There are no investment tips in the book, nor hints on how to accumulate wealth in a short period. The book tells you about how a market is organized without money and what it is in general.
What are the book’s downsides?
It’s hardly a weak spot, but Roth gives only examples based on American reality and mentality. But since he’s a man of practice, he only speaks of his own experiences.
The book is exciting and useful but only time will tell if we can suit it to our reality, mentality, and needs on both personal and state scale.
What’s the practical use for those ideas?
Methods proposed by Alvin Roth could be useful in government programs.
It’s not a secret, that matchmaking markets where corruption strengthens turn into commodities markets, where the price is the only decision-maker.
And what about personal use?
The matchmaking method can be used to find a partner. One of Roth’s students used it on a dating service.
A beautiful woman posting her pictures got a ton of letters and couldn’t respond to everyone. The choice was too broad. Over some time, men left without the answer start writing to lots of other women. It all leads to a multiplication of shallow uninformative and dull letters people receive all over the dating service.
As a measure of the experiment, for five days both men and women were only allowed to send ten letters. Also, each user received two virtual roses they could attach to a letter. Some users received a total of six roses. In the environment of overabundance, the aspect of attention and interest is vital. Roses were a means to signal your interest. Roses attachments showed to grant users a 20% higher chance to arrange a date.
Signal of interest can not only speed up your dating service experience but become helpful in any area where matchmaking takes place. If you are looking for the job offer, you show interest by attaching a CV and a covering letter.
Summary of Who gets what and why
This book gives a new perspective on mundane problems and finally pushes you to redesign your way of life, behavior and see opportunities where you couldn’t see any.
On the other hand, I’d hardly recommend reading its full copy. Compare the ideas and action plan insights density in other business books we reviewed:
- CROSSING THE CHASM BY G. MOORE
- BE OBSESSED OR BE AVERAGE BY G. CARDONE
- THE E-MYTH ENTERPRISE BY M. E. GERBER
- THE SUBTLE ART OF NOT GIVING F*CK BY MARK MANSON
- CREATIVITY INC. BY ED CATMULL
- ZERO TO ONE BY PETER THIEL
- NEVER EAT ALONE BY KEITH FERRAZZI
- GOOD TO GREAT BY JIM COLLINS
- THE LEAN STARTUP BY E. RIES