David Kreps, Distinguished Fellow 2010
David M. Kreps’ work in game theory, decision theory, and finance has profoundly shaped the direction of economic research. His thought has influenced most economic theorists, and serves as both the technical foundation and inspiration for much modern research.
Kreps is one of the premier game theorists of his generation, and was one of the leaders in the integration of game theory into mainstream economics that took place in the 1970’s and 1980’s. In a series of papers, Kreps together with Milgrom, Roberts, and Wilson pioneered the study of reputation models, which add a small probability of “commitment types” to capture the idea that rational, long-lived players may be able to build a reputation for playing in a specific way. Kreps and Wilson’s “sequential equilibrium” highlighted the key role of beliefs about unobserved deviations in determining which equilibrium outcomes are consistent with sequential rationality; it is the most used refinement of Nash equilibrium. The Cho and Kreps “intuitive criterion” develops further restrictions on reasonable out-of-equilibrium beliefs in the setting of signalling games. The desire to understand and motivate these refinements led Kreps to study learning in games, which has triggered fruitful literatures in game theory and in macroeconomics. In work with Fudenberg, Kreps inspired the modern theory of learning in games, re-introducing and re-interpreting the classic process of fictitious play, anticipating the concepts of self-confirming equilibrium and quantal-response equilibrium, and introducing the process of stochastic fictitious play.
Kreps has made fundamental contributions to decision theory, where his work was well ahead of its time. Kreps’s paper on preference for flexibility was the first to present axioms for preferences over choice sets, and is the cornerstone of the recent literature that provides axiomatic characterizations of “behavioral” phenomena such as a preference to avoid temptation. The related Kreps and Porteus paper provides a temporal consistency axiom that allows agents to care about when uncertainty resolves. Kreps’ monograph on choice theory has trained and inspired generations of decision theorists.
Finally, Krep’s work with Harrison characterizing no arbitrage restrictions in terms of a martingale equivalent measure is the foundation of modern asset pricing theory and practice. Another Harrison-Kreps contribution opened the way to models of speculative bubbles when traders have diverse beliefs.
A pioneer in several areas of economic theory, David stands in the finest tradition of Distinguished Fellows.