Oskar Morgenstern

Oskar Morgenstern an Austrian-American economist of the twentieth century (1902-1977) who, with John von Neumann, founded the mathematical theory of games and thereby transformed economics into a formal, strategic science. His collaboration with von Neumann produced the Theory of Games and Economic Behavior, a work that introduced the analysis of rational conflict and cooperation to the social sciences.

Early Life and Education

Oskar Morgenstern was born on 24 January 1902 in Gorlitz, in the German province of Silesia, the son of a wealthy industrialist family. His mother was a daughter of the German emperor Frederick III, a connection that gave the family standing but also left it vulnerable to the upheavals of the First World War. The collapse of the imperial order in 1918 and the later inflation ruined much of the family fortune and shaped his lifelong concern with risk and uncertainty.

He studied at the University of Vienna, where he came under the influence of the Austrian School of economics and of the logical and philosophical circle centred on Ludwig von Mises and the Vienna Circle. He received his doctorate in 1925 with a thesis on the marginal productivity theory of capital. After further study in London, Paris and Rome he qualified as a lecturer and began to teach at the University of Vienna.

In the 1930s he worked as an economic adviser and edited a business-cycle research institute, and he published a study of the limits of economic prediction that argued, long before much of the profession, that forecasts of economic events are inherently unreliable because expectations themselves alter the system being predicted. This early interest in uncertainty prepared him for the theory he would later develop.

Vienna, Princeton and the Games Project

The annexation of Austria by Nazi Germany in 1938 forced Morgenstern, who was of Jewish descent, to leave the country. Through the help of friends he obtained a position at Princeton University in the United States, where he arrived in 1938 and remained for the rest of his academic career. Princeton brought him into contact with the mathematicians and physicists of the Institute for Advanced Study and with a remarkable community of European emigre scholars.

At Princeton he met John von Neumann, the Hungarian-born mathematician who had already worked on the mathematical foundations of strategy. The two discovered a shared interest in the problem of rational behaviour in conflict and began the collaboration that produced their joint book in 1944. It was Morgenstern who pressed for the wider economic and social interpretation of the theory, while von Neumann supplied much of its mathematical machinery.

After the war Morgenstern helped to found the mathematics department at Princeton and later directed an econometric research institute, where he recruited leading figures in the emerging field. He was elected president of the American Economic Association in 1976, the year before his death, in recognition of his role in reshaping economic theory around the analysis of strategic interaction.

The Theory of Games and Economic Behavior

The Theory of Games and Economic Behavior, published in 1944, is one of the most influential books in the history of the social sciences. It proposed that economic behaviour be studied as a game, a situation in which the outcome for each participant depends on the choices of all the others. This reframing replaced the older image of isolated calculation with one of interdependence among rational agents.

The book introduced the concept of the minimax strategy and proved the fundamental theorem that every finite two-person zero-sum game has a value and optimal strategies for both sides. It also introduced the notion of a coalition and the characteristic function, and analysed the ways in which a group of players might divide the gains of cooperation. These tools opened a systematic study of bargaining, voting and coalition formation.

The theory met with resistance from economists who doubted that human behaviour could be reduced to mathematical strategy, but it gradually became foundational. Its vocabulary of players, payoffs, strategies and equilibria is now standard, and it supplied the conceptual basis for later work by Nash, Selten and Harsanyi, who extended it to non-cooperative and incomplete-information settings and were honoured for it with the Nobel Prize.

Contributions to Economics and Forecasting

Beyond game theory Morgenstern made lasting contributions to the study of economic statistics. In a celebrated book written with the statistician Frederick Mosteller he examined the accuracy of economic forecasts and found that many widely quoted predictions were no better than simple extrapolation or chance. This scepticism about purportedly scientific forecasting became an enduring theme of his work.

With his colleague John D. Williams he analysed the stock market and argued that price movements are governed by pervasive uncertainty and the interaction of many traders, anticipating ideas later associated with the efficient-market and rational-expectations debates. He was also a pioneer of experimental economics and the design of controlled tests of economic behaviour.

He was committed to the view that economics must be founded on precisely stated assumptions and measurable magnitudes, and he worked to integrate mathematics, statistics and social analysis. His insistence on rigour helped to establish the mathematical standards of modern economics and the discipline of operations research that grew out of wartime and postwar collaboration between economists and mathematicians.

Influence and Legacy

Game theory grew from a specialised branch of mathematics into a central language of economics, political science, biology and computer science. Its applications range from the design of auctions and markets to the study of deterrence and international negotiation, and every student of the social sciences now learns the concepts that Morgenstern and von Neumann first set out. The field they founded reshaped how scholars model rational behaviour.

Morgenstern trained a generation of students and helped to build the institutions through which mathematical social science flourished in the United States. His work on forecasting accuracy encouraged a healthy scepticism toward economic predictions, and his calls for empirical testing and precise theory anticipated the methods that now dominate the field.

He died on 26 July 1977 in Princeton, New Jersey. He is remembered as one of the founders of modern game theory and as a bridge between the Austrian tradition of economic thought and the mathematical approach that came to define the discipline. His name remains attached to the fundamental problems of strategy and cooperation that he did so much to clarify.

See also

• Game theory
• John von Neumann
• Minimax theorem
• Austrian School of economics