The Undercover Economist

Chapter 7 introduces the fact that governments auction off the radio spectrum used by cellphone companies to run their networks. There is only so much spectrum available, so governments try to take advantage of the scarcity. They hire economists to set up the auctions, with varying results. One auction raised less than 1% of the expected price, while another raised 10 times the expected price. This task of “auctioning air” has high stakes and requires cleverness to succeed.

To introduce auctions and their economic ramifications, Harford then discusses the mathematician John von Neumann, who is often considered the “best brain in the world” (166). He is considered to have originated the field of game theory and used it to develop mathematical tools that help explain economics, biology, and even the Cold War. Game theory, in a nutshell, is “any activity in which your prediction of what another person will do affects what you decide to do” (166). Game theory encompasses poker, love, war, or bidding in an auction. For a game theorist, games are mathematical objects, not just entertainment or strategy.

Poker is relatively simple: Players conceal their cards until the final showdown, when the player with the best cards wins all the accumulated bets.