In a recent interview, we sat down with Professor Paul Milgrom, the 2020 Nobel Prize Winner in Economics and the foremost voice in auction theory and market design. Professor Milgrom shared with us why he chose auction theory as his field of research and explained the contrast between theory and practice. The discussion ranged from large-scale broadband spectrum auction designs to the fundamental need of auctions in our day-to-day.
Beginnings
Professor Milgrom joined Stanford as an MBA student, but he always showed a knack for research. His professors, taking notice of this, invited him to the PhD program at Stanford.
Professor Milgrom attributed much of his early success to great advice from his peers: most notably, one of his colleagues in the second year of the PhD program advised Professor Milgrom to work with Ben Holmstrom. Professor Milgrom convinced Professor Holmstrom of his aptitude when he solved a problem that he and others in his department had struggled with, showing an outstanding capability even from the beginning.
Path to Auction theory
Until the early 1990s, Professor Paul Milgrom focused mainly on abstract, theory-driven questions. His career shifted when he, Robert Wilson, and Preston McAfee developed the simultaneous multiple-round auction (SMRA), first used by the FCC in 1994 to allocate radio spectrum under the 1993 Budget Reconciliation Act.
This success greatly advanced Milgrom’s career. He later co-founded Auctionomics, advised firms and governments on auction strategy, and applied auction design to sectors such as spectrum, agriculture, and electricity, shaping modern market design.
Theory and Practice
When asked about the ‘hypothetical’ nature of the theory, Professor Milgrom noted how theory is accurate only under certain conditions and assumptions. This is the case with many economic theories, which naturally leads to the discrepancy between theory and real-world implications.
Professor Milgrom also added:
Theory involves simplification a limited data set and a lower number of variables
Practice is a mix of art and science
Theoretical conditions are still useful; they help navigate through more complex situations and should be applied where there is useful
Why are auctions needed?
In the interview, Professor Milgrom was asked why auction theory lives in relative obscurity compared to other fields of study. Professor Milgrom explained the significance and importance of auctions and auction design: auctions are necessary for products for which discerning a fair market value is not possible.
Auctions are useful when:
The seller is uncertain about demand or the market
The seller does not know the right price to set
The items for sale are complements or substitutes
The item is unique or one of a kindIf market factors should dictate prices, an auction is the purest form of this, where each economic agent acts for the commodity under their own prerogative. To maintain this efficient auction design is required.
These auctions are all around us, from broadband connections to web ads and the sports teams we all love.
Irrationality
During the interview, Professor Milgrom was asked how he accounts for irrationality from individuals in auction and market design.
He explained how it was important to know who was bidding for the product on sale, a machine or a human. There are thousands of algorithms with deep neural conditioning constantly bidding for ad space online and in other fields.
When considering how people or machines bid, key questions include:
What type of bidder are they?
What kinds of mistakes might they make?
How capable are they of optimizing their bids, and how likely are they to do so?
By answering these questions, one can anticipate gaps in other bidders’ strategies and account for their likely mistakes or irrational behavior when participating in auctions.
Interdisciplinary Work
The arms of economics expand far and wide; Professor Milgrom’s work is a testament to this. He won a technical Emmy for his work on the 2016 U.S. incentive auction, which allocated TV broadcasting rights using both economics and computer science.
The extent of interdisciplinary work varies from field to field and assignment to assignment, and hence, according to Milgrom, knowledge in many subjects comes in handy.
Insights from research
Professor Milgrom highlighted key insights from his research, including the No Trade Theorem, and emphasized that effective research must account for the flexibility of conclusions and the context in which they apply. Above all, he reminded us that connecting theory to practical applications is essential for meaningful work.
Professor Milgrom gave us much to reflect on, including the subtle forces that shape our careers and lives, the art of balancing theory and practice, the central role of auctions and market design, the irrational behaviors that drive economic activity, and above all, the importance of remaining open to many fields of study.