Myerson, Maskin, and Hurwicz Win Nobel Economics Prize

Once again, I guessed wrong - Fama once again didn't get the nod. Instead, the prize went to three Americans who were instrumental in developing and forwarding the economics sub-field know as "mechanism design". Congratulations to Leonid Hurwicz of the U of Minnesota, Roger Myerson of the U of Chicago, and Eric S. Maskin, a professor at the Institute for Advanced Study in Princeton.
For more about them, read this piece in the NYTimes Online.

If I keep guessing Fama, I should eventually be right (as long as he stays healthy).

Prediction Markets and The Nobel Prize in Economics

The lists of likely Nobel Economics Prize winners have started. I chose Eugene Fama for last year's prize based on his early work supporting market efficiency and his more recent work examining weaknesses in the tradional Capital Asset Pricing Model (CAPM). You've just gotta love an academic with the stones to turn his back on his career-making earlier work when he finds new evidence that contradicts it.

But last year, I came up with bupkes/nada/diddly. So this time I'll stick with the same hand.

In case you're interested, InTrade has opened trading in the Nobel Prize contracts. Fama's currently leading the pack in the econ trading, but it's still early.

HT: Greg Mankiw

Update: When I wrote the original post, I probably should have chosen my a better phrase than "debunking" when referring to Fama's recent work . I was referring to his work with Kenneth French on Size and Book-to-Market as proxies for factors with more explanatory power than the traditional CAPM "beta" in explaining returns. So a more correct way of describing Fama's later work would be "debunking the traditional CAPM model".

One way to interpret his work with French is that there are risk factors (size, book to market) other than the CAPM systematic risk beta that are priced in the market. So he's not exactly taking shots at the efficient markets hy[pothesis rather than at the risk-return model that was most often used to test it.

Interview With Myron Scholes

Holman Jenkins recently conducted a must-read interview of Nobel Prize Winner Myron Scholes. It's available in today's OpinionJournal.com. Here are a few choice nuggets:

...Why can't things always be smooth and nice and predictable? Myron Scholes, operator of the hedge fund Platinum Grove Asset Management, says you wouldn't like it if they were.

...Start with the commonplace that risk is one side of a coin whose other side is reward. "We all have a taste for it," he says. "In life, it would be kind of boring if there was no risk. On the other hand if there's too much risk, too much uncertainty, too much chaos, we can't handle it either. We simultaneously want order and disorder, simultaneously want risk and quiescence."

And my favorite, when asked about the now-famous (infamous?) Long Term Capital Management failure (note: emphasis is mine)

He readily acknowledges that the episode was financially and personally embarrassing: "In life you pay tuition, right? Sometimes you pay too much tuition. Sometimes learning is costly."

Read the whole thing here. All in all, it's a fascinating look at one of the most influential financial thinkers of our times, and an easy read to boot.