Prize-Winning Economist Defies Brain Drain

Why do you always get out-bid on Internet auctions? Are buyer's recommendations reliable? Why does the price always rocket at the last minute?

If you want to understand how ebay works, then 36-year-old Axel Ockenfels is your man. Online bidding practices are one of his areas of expertise, and his students at the laboratory for controlled experimental economics at Cologne University are finding out what it takes to get what you want in the cut-throat world of the online marketplace.

"Typically, what happens is, the person who wins, pays too much," says Ockenfels. "The person who wins isn't the person who's estimated the value of the product most precisely, but the person who's most overestimated its value."

Experimental economics

Ockenfels' analysis of contemporary economic behavior has propelled him to the forefront of his field. A protegé of Reinhard Selten, Germany's one and only winner of the Nobel Prize for Economics, Ockenfels' research into experimental economics and game theory sheds light on the way modern man behaves when it comes to economic decision making -- and proves that traditional economics has had its day.

"The hypothesis that man is rational and egotistical is one that wasn't put to the test for a long time," explains Ockenfels. "Man probably isn't as self-serving as economists would like him to be. Man himself hasn't changed, but economic theories have. New ideas and empirical evidence have been incorporated into economic theory and the concept of the 'homo oeconomicus' is now less accepted."

The psychology of economics

According to game theory, there's a key psychological aspect to economics. Envy, rivalry and a desire for fairness all play a role.

"People's first priority isn't just getting a bargain," insists Ockenfels. "They also keep an eye on what other people are getting and their status in their peer group."

"It's important to understand theory," he stresses, "but it's also important to understand how people react. I feel that a lot of textbooks neglect the empirical and experimental dimensions of economic behaviour and overly concentrate on theories developed in ivory towers."

Leaving the ivory tower -- but not Germany

No one can accuse Axel Ockenfels of living in an ivory tower. At the age of 36, he's already one of the influential economic scientists in the world, hotly pursued by the world's best universities.

But unlike many of Germany's A-list scientists, he's never been tempted to join the brain-drain crowd and head to the US to enjoy the higher salaries and first-class research opportunities available at the country's generously funded ivy league schools. Now that he's scooped Germany's most lucrative research prize, worth €1.55 million ($2 million), he probably feels vindicated in his decision.

As far as he's concerned, Germany is where he can work best.

"No other country in the world has as many experimental laboratories," he says. "But people won't have realized this until the next generation of professors has come of age."