Detroit Native Paul Milgrom on Winning the Nobel Prize in Economics

The University of Michigan alum has designed auctions that make a Sotheby’s art sale look like child’s play
Paul Milgrom
Paul Milgrom

The announcement of the Nobel Prize for economics is usually a sleepy affair, if only because the research is often so complex and intricate that most people tune it out. But this year, the moment Detroit native Paul Milgrom learned he’d won became an Internet sensation — more than 6 million views! — when his confused and strangely subdued reaction was captured on a doorbell camera video. His co-winner, Bob Wilson, went to Milgrom’s door at 2:15 a.m. to tell him because the Nobel folks, back in Stockholm, couldn’t get through to his cellphone. He’d turned it off that night to avoid political spam.

We didn’t have that kind of trouble reaching Milgrom, who went to high school in Oak Park
and earned a mathematics degree at University of Michigan before a life in research and academia earned the 72-year-old the best-known honor in all of science. Milgrom and Wilson won “for improvements to auction theory and inventions of new auction formats,” according to the Nobel website.

In this conversation, Milgrom recalls his upbringing in Detroit and tries valiantly to explain his research to those of us most familiar with auctions from eBay or, say, that time James Bond bought a Fabergé egg in Octopussy.

Hour Detroit: Give our readers the most accessible explanation you have for your work.

Paul Milgrom: The applied research is about really hard auction problems. Your readers are accustomed to an auction being something like people bidding on an object for sale on eBay or at Sotheby’s. Hard auction problems are when there are a variety of things that are interrelated in different ways. The hardest one we have ever designed was in the early 1990s when the Federal Communications Commission needed to move television broadcasters to a different part of the radio frequency spectrum to make room for wireless mobile broadband carriers. We had to figure out what we wanted to buy from the TV broadcasters and then we had to take those and repackage them to sell to the likes of T-Mobile and others buying spectrum for their wireless services. We invented new auction methods that made that possible. That’s probably the easiest way that I can explain it to you without getting too deep into the details.

Oh, challenge us. So you’re not focused on the auctions we see in pop culture? 

The way you see auctions in pop culture is usually to show high lifestyle. It’s people bidding for art or diamonds or something. It’s not portraying the economics, it’s portraying the lifestyle. If you go to a major art auction in New York, you go in the day before and you go around and you see what’s for sale and they have drinks and champagne and it’s pretty glitzy. That’s not really what I’m working on. I’m looking at, when the auction problems are hard or when the stakes are really, really, really high, how should you bid?

Come on. Try another example. 

OK. I helped a company in Canada bid to be a supplier to the government. The government wanted the bidders to supply catalogs from which the various government offices would be able to buy things. So a bid was a catalog that would have 20,000 prices. The government had a way of weighting the bids relative to each other to decide which catalog would be winning. So that’s a really complicated auction. It means 20,000 prices and the government is going to use them in certain ways to determine who is going to be its supplier. That gives you a sense of what the differences are and why somebody might want expertise.

Does it have any relevance to those of us who buy or sell stuff on eBay? 

Well, it all began with us studying auctions as they existed. My co-winner and dissertation advisor, Bob Wilson, had started writing about something called the Winner’s Curse, which was the problem that if you’re bidding for something and you’re not sure what it’s worth, you’re more likely to win the auction if you’ve overestimate than if you’ve underestimate. In our studies, we started studying when that is a serious problem and when is it not.  If you’re bidding for a piece of art and you’re not sure if it’s authentic and you’re bidding against an expert, you shouldn’t be bidding in that auction. You’ll only win if you overpay. That’s not a problem if you know why you’re buying something and there’s some reason that it’s especially valuable to you. So we studied all of that.

What brought you to this wrinkle of economics? 

We actually started this research just to understand competitive markets better. We started delving into not just traditional options, but how prices get set and how the competitive economy works. It was sort of a natural progression in economic research. Turns out, we realized we could create better ways to solve existing problems and especially really hard ones that nobody knew how to sell. 

Did your upbringing prepare you for your life in math or economics or business?

I was a really shy, nerdy kid. I was not popular at all. People made fun of me. I lived in my head. I used to dream of being Albert Einstein or something. But I was interested in math and I was interested in science. I just suffered through high school, like so many kids do, and dived into books and subjects that interested me. So that’s what life in Detroit was like. I was the first college graduate and the first high school graduate in the male line that I came from. My parents had always told me, “You’re going to college.” In fact, the high school I made up my own proof of the Pythagorean Theorum.  It was clear that I was one of those guys who liked to think about things that way and delve into ideas.

How did you end up in economics? 

I stumbled into it. I loved math. At Michigan, I wasn’t that good a student, actually. I was pretty good math, but I wasn’t really very well focused. And then I worked for five years as an actuary and matured as a man. Then I realized I was bored, and I went to Stanford University to get an MS. But I started asking research-like questions to my professors, and they pulled me aside and said, “You’re in the wrong program. MBA students are interested in the problems, not the methods. You’re a different kind of student.” So they recruited me into a decision sciences program, but it turned out that the methods I was using were game theoretic. There wasn’t very much game theory yet in economics, but our work started to become very influential within economics, so economics expanded
to include us.

I see a wall decorated with honors. Is the Nobel different?

I’ve had a lot of awards in my career, but you’ve never heard of the Nemmers Prize or the BBVA. These are big prizes, but everybody knows the Nobel Prize. My grandson, who just turned 9, called to congratulate me and he remarked, “Even my teacher knows what that is! Are you famous enough to be on YouTube?” It has a recognition
unlike any other prize.

Is that satisfying?

Yeah. What difference does this make to my life? What am I going to do differently? I’m going to research, I’m going to teach, I’m going to consult. But what I hadn’t understood is all the love it brings out of the woodwork. I’ve gotten messages from people I went to elementary school and high school with, middle school, college. I’ve gotten a lot of really warm, nice messages. And now I get interview and speaking invitations. So the Nobel has made a difference in terms of my public visibility. 

Since you were picked on as a kid, is there any part of you that wishes you could see the face of some kid who tormented you when you were small?

Oh, it’s not even just when I was small. There are people who I’ve had trouble with in my adult life, within the last decade or two as well. But I have decided that this is no time to be petty. So those thoughts go through my mind, yes. Do I act on them? No, I suppressed them. It’s fine. I’m doing great