Saturday, October 10, 2009

Nobel Economics committee can't go wrong

Economist Alex Tabarrok has identified an interesting situation and points it out. Even as opinions are divided on the Nobel Peace Prize committee’s decision this year, Prof. Tabarrok says that the Nobel Economics Prize committee can't go wrong this year.

We need to know a couple of things before we can appreciate why he is saying that.

In the betting market for the Economics Nobel prize this year, Eugene Fama is the leading candidate. He has the best odds.

Fama is best known for his Efficient Market Theory (EMT) which might be Nobel-worthy. To oversimplify, EMT states that markets are always "informationally efficient" and all known facts are instantly factored into the price of an equity/entity.

So here’s why this year’s Nobel committee’s decision will be self-fulfilling. Let’s say that they do give it to Fama. Then he deserved it because even the betting markets demonstrate an instance of EMT at work. All is well.

Let’s say they give it to someone else. Then the betting markets were wrong, and the EMT didn’t hold true at least in this one instance. (The odds for the eventual winner should have been better in a very efficient market.) The prize shouldn’t be given to the theory since the EMT doesn't always hold. (Aside: Many are now arguing that EMT doesn’t always hold true.)

Therefore, either way the Nobel committee can’t go wrong this year.

1 comment:

Arvind said...

Ram,

I actually think the opposite. No matter who they give it to the commitee is wrong.

Its stunning how unfit these nobel prize winning theories in economics, unlike physics and the exact sciences, are. For example, Merton and Scholes for the Black-Scholes theory. This theory is one of the intellectual frauds of history that lead to amongst other things the misvaluation of risk that helped caused the current crises - they underestimate probability of tail events because the authors were mathematically incompetent. No nobel prize theory in the exact sciences has failed so spectacularly. Other examples of the failure of economics abound and you can read either this long overdue confession from economists in a link at the bottom or Krugmans blog.

The nobel prize in econ was not created by Alfred Nobel but given by the Swedish bank in honor of Alfred E Nobel. So this means, I can give you a prize in honor of Alfred Nobel for any random thing and hopefully con others into calling it the nobel prize. See what a hoax this is.

The right thing to do is to scrap the economics prize because the field is a failure. So no matter who they give it to, it would be wrong.

Arvind

http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-of-academic-economics/KWP_1489_ColanderetalFinancial%20Crisis.pdf