Why Give Nobels for Financial Economics?

Pablo Triana sends me an open letter he's written to the Swedish central bank, telling them to please stop giving out Nobel prizes in economics to "flawed, unworldly, and dangerous theoretical finance constructs":

At least two of the theories awarded with the Economics "Nobel" have been behind the very worst financial crises to have afflicted the world since the 1929 crash; Black-Scholes-Merton was the inspiration for the strategies that gave us October 1987´s Black Monday, the most devastating one-day drop in the history of Wall Street (which gravely threatened to sink the system); while Portfolio Theory was the inspiration for the creators and adopters of VaR, which outrageously misguided guidance and capacity for forcing destabilizing liquidations were to blame for the 1998 LTCM crisis and the current malaise (both of which, certainly, put us in great peril).

Triana has co-authored letters with Nassim Taleb in the past, and this is very much consistent with Taleb's views. It's not such a bad idea: right now it's pretty hard to say that, in aggregate, recent advances in financial economics have been, on net, a good thing. So why encourage them with Nobels?

Comments

[Alex Filonov:]

It's not theories, it's practice. Both mentioned strategies are sound when implemented on a small scale. But when almost everybody starts using them, you run into the biggest economic problem of all: "You can't beat the market if you are the market" (Jim Cramer on LTCM debacle in "Confessions of a Street addict"). In other words, any strategy defeats itself when significant number of market participants starts using it.

2008 Dec 29 11:10 AM

[jimmy46:]

The Nobel prize for economics is a relatively recent addition,
I've always thought it a poor choice.

Engineering, microbiology and a number of other disciplines are much more deserving.

2008 Dec 29 04:19 PM

[TinyTim:]

Economics is a social science that aspires to be a "hard" science, complete with rigorous math. There are bonehead economics winners just like there are bonehead peace-prize winners. Applied science, like engineering or medicine, usually reveals itself fairly quickly as good or bad. Applied economics, such as finance and investment, has a lot longer latency.

I see no reason to remove the Nobel motivation or incentive. It's marginal anyway, so it wouldn't make much difference. Much applied economics is directly connected to wealth creation. That's penty of incentive. "Bad" or faulty science is a byproduct of good science. The Nobel panel is certainly not infallible. Let the practictioner beware.

Lastly, if the human race could snuff itself out due to genetic modifications or nuclear annihilation, does that mean the medicine or physics prizes are too dangerous to be allowed to continue? Similar to Almagordo, a few weeks ago, there was debate about whether the startup of a new accelerator at CERN could create a black hole of Earth.
By comparison, what's the loss of a few bucks between boneheads?

2008 Dec 29 11:45 PM

[auto44:]

Since nobel prizes have been given out as a slap in the face of our president I no longer put any faith in them. ( Al Gore & Jimmy Carter) I see nothing noble,pardon the pun, in this organization acting this way. Polarization is bad enough in this country,we don't need their help making it worse.

2008 Dec 30 02:00 AM

[Gedankonomist:]

Hey! Al Gore deserved the prize, he invented the internet, after all.


On Dec 30 02:00 AM auto44 wrote:

> Since nobel prizes have been given out as a slap in the face of our
> president I no longer put any faith in them. ( Al Gore & Jimmy
> Carter) I see nothing noble,pardon the pun, in this organization
> acting this way. Polarization is bad enough in this country,we don't
> need their help making it worse.

2008 Dec 30 06:00 PM

[cr0bar:]

There is no Nobel prize for economics, I think what you are referring to is the Swedish central bank prize for economics in honour of Alfred Nobel. I don't believe he mentioned economics in his will?

Jan 06 11:17 AM