John von Neumann : biography

Von Neumann proposes to replace classical logics, with a logic constructed in orthomodular lattices, (isomorphic to the lattice of subspaces of the Hilbert space of a given physical system).Philosophical Papers: Volume 3, Realism and Reason, Hilary Putnam, Cambridge University Press, 27 December 1985, p. 263

Game theory

Von Neumann founded the field of game theory as a mathematical discipline. Von Neumann proved his minimax theorem in 1928. This theorem establishes that in zero-sum games with perfect information (i.e., in which players know at each time all moves that have taken place so far), there exists a pair of strategies for both players that allows each to minimize his maximum losses (hence the name minimax). When examining every possible strategy, a player must consider all the possible responses of his adversary. The player then plays out the strategy which will result in the minimization of his maximum loss.

Such strategies, which minimize the maximum loss for each player, are called optimal. Von Neumann showed that their minimaxes are equal (in absolute value) and contrary (in sign). Another result he proved during his German period was the nonexistence of a static equilibrium. An equilibrium can only exist in an expanding economy. Paul Samuelson edited an anniversary volume dedicated to this short German paper in 1972 and stated in the introduction that von Neumann was the only mathematician ever to make a significant contribution to economic theory.

Von Neumann improved and extended the minimax theorem to include games involving imperfect information and games with more than two players, publishing this result in his 1944 Theory of Games and Economic Behavior (written with Oskar Morgenstern). The public interest in this work was such that The New York Times ran a front-page story. In this book, von Neumann declared that economic theory needed to use functional analytic methods, especially convex sets and topological fixed point theorem, rather than the traditional differential calculus, because the maximum–operator did not preserve differentiable functions.

Independently, Leonid Kantorovich’s functional analytic work on mathematical economics also focused attention on optimization theory, non-differentiability, and vector lattices. Von Neumann’s functional-analytic techniques—the use of duality pairings of real vector spaces to represent prices and quantities, the use of supporting and separating hyperplanes and convex set, and fixed-point theory—have been the primary tools of mathematical economics ever since.

• Von Neumann was also the inventor of the method of proof, used in game theory, known as backward induction (which he first published in 1944 in the book co-authored with Morgenstern, Theory of Games and Economic Behaviour).

Mathematical economics

Von Neumann raised the intellectual and mathematical level of economics in several stunning publications. For his model of an expanding economy, von Neumann proved the existence and uniqueness of an equilibrium using his generalization of Brouwer’s fixed point theorem. Von Neumann’s model of an expanding economy considered the matrix pencil  A − λB with nonnegative matrices A and B; von Neumann sought probability vectors p and q and a positive number λ that would solve the complementarity equation

pT (A − λ B) q = 0,

along with two inequality systems expressing economic efficiency. In this model, the (transposed) probability vector p represents the prices of the goods while the probability vector q represents the "intensity" at which the production process would run. The unique solution λ represents the growth factor which is 1 plus the rate of growth of the economy; the rate of growth equals the interest rate. Proving the existence of a positive growth rate and proving that the growth rate equals the interest rate were remarkable achievements, even for von Neumann.For this problem to have a unique solution, it suffices that the nonnegative matrices A and B satisfy an irreducibility condition, generalizing that of the Perron–Frobenius theorem of nonnegative matrices, which considers the (simplified) eigenvalue problem