US citizen Thomas Schelling and Israeli Robert Aumann have won the 2005 Nobel prize in economics for their work in an area known as game theory.
Thomas Schelling (left) and Robert Aumann (right), 2005 Nobel winners
They will share a 10m kronor ($1.3m; £723,000) cash prize awarded by the Swedish central bank.
Professor Schelling has specialised in explaining strategies of international conflict, such as nuclear war.
Professor Aumann has developed the theoretical underpinnings of bargaining, co-operation and conflict.
Professor Schelling, 84, a US citizen, is distinguished university professor at the Department of Economics and the School of Public Policy at the University of Maryland, and emeritus professor of political economy at Harvard University, where he had taught for 20 years.
Professor Aumann, 75, who holds both US and Israeli citizenship but was born in Germany, teaches at Centre for Rationality at the Hebrew University of Jerusalem. He and his family fled Germany for the United States in 1938.
He told reporters that "this was a total surprise. I'm totally overwhelmed."
He said that he hoped that his work could be applied to conflict resolution even in situations like the Middle East.
"I think game theory creates ideas that are important in solving and approaching conflict in general," he added.
Thomas Schelling told reporters that "they (the Nobel committee) linked us together because he is a producer of game theory and I am a user of game theory."
He said his work focused on "using game theory to help myself understand conflict situations and opportunities."
Game theory was first developed by Hungarian mathematician John von Neumann in the 1940s and 1950s as a way to understand decision-making in the real world where several parties were bargaining, perhaps with unequal resources and information.
It developed into a mathematical theory of strategy, which helped explain which decision, to cooperate or not with rivals, had the best pay-off..
John Nash, John Harsanyi and Reinhard Selten won the Nobel economics prize in 1994 for their pioneering work in this area.
Mutually assured destruction
The Royal Swedish Academy of Sciences, which awards the Nobel economics prize, said in its citation that the two current winners had enhanced understanding of co-operation and conflict through game theory analysis which they applied to real-world problems.
Professor Schelling was among the first to apply the insights of game theory to international relations, looking at the nuclear arms race in his classic book The Strategy of Conflict.
Professor Schelling used game theory to explain nuclear war
He argued that the capability to retaliate was more useful than the ability to resist an attack, and that uncertain retaliation was more credible than certain retaliation.
These insights formed the theoretical underpinnings for the strategy of nuclear deterrence "and proved of great relevance for conflict resolution and efforts to avoid war", the Nobel Prize committee said.
Indeed, both the USA and the former Soviet Union adopted such a strategy - known as mutually assured destruction - during the Cold War, when they developed long-range nuclear weapons but agreed not to develop defensive weapons such as ABMs.
Professor Schelling also used game theory to develop an explanation of why segregation occurs.
Recently, his work has focused on building coalitions for climate change.
Co-operation or conflict
Professor Aumann's work has centred on a different element of game theory, the question of whether co-operation increases if games are continually repeated.
He showed that co-operation is less likely when there are many participants, when interactions are infrequent, when the time horizon is short or when others' actions cannot be clearly observed.
"Insights into these actions help explain economic conflicts such as price wars and trade wars, as well as why some communities are more successful than others in managing common resources," his citation said.
Professor Aumann received a PhD in mathematics from MIT, and his work, in contrast to that of Professor Schelling, is highly mathematical.
The Nobel economics prize was launched in 1968 by the Bank of Sweden in memory of the Swedish industrialist Alfred Nobel.
The prize has been dominated by Americans.
In the last six years, only one non-US citizen, Finn Kydland of Norway, who teaches in California, has won the Nobel economics prize.