The non-ironic Nobel

By Felix Salmon
October 12, 2009
Barry Ritholtz and Dan Gross, I'm looking at you. And you too, Peter.)

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Isn’t it ironic that Eugene Fama didn’t win the Nobel prize in economics? No, actually, it isn’t, and I’d like to give a special Alanis Morissette award to anybody who thinks it is. (Barry Ritholtz and Dan Gross, I’m looking at you. And you too, Peter.)

The ostensible irony here is that Fama invented the efficient markets theory — but the markets which predicted his win were wrong! Except that’s not what happened. Barry is completely wrong when he says that Fama was the “odds on favorite” to win the prize — in fact, as he himself noted yesterday, Fama had 2-to-1 odds against him winning, implying that the probability of Fama winning was about one in three. The Ladbrokes odds actually implied that Fama would not win, and in that sense they were absolutely right.

But the prize ended up going to Elinor Ostrom and Oliver Williamson, and the odds on their winning were even longer. Doesn’t that prove that the bookies were wrong? Well, it would if Ostrom and Williamson were more likely to win the prize than Fama. But they weren’t. The thing about the Economics Nobel is that it has an absolutely enormous number of possible winners, which means that most winners are long-shots. It’s not at all unusual that the winner had 50-1 odds against them: if anything it’s unusual that either of them were on the list at all. (In the Harvard betting pool, none of the 149 entrants bet on Ostrom.)

What’s more, a list of Ladbrokes odds is emphatically not a prediction market, since there’s no two-way market in prices. (You can’t bet against Fama winning the prize at 2-to-1 odds, you can only bet on it.) There was a real prediction market in the economics Nobel over at InTrade, but it only featured three names: Fama, Paul Romer, and Ernst Fehr. And total volume in all three names was exactly zero, which means that not a single price (or extrapolated probability) came out of the market. Even Eugene Fama wouldn’t claim efficiency for a non-clearing market with no prices.

The simple fact is that the long tail of possible winners provided the actual winner — just like it normally does with this particular prize. The favorite (who was not an odds-on favorite) did not get the prize. There’s nothing unexpected about that outcome, and certainly nothing ironic.

Update: I’ll add this quickly, before the inevitable comments start appearing: yes, I know that it’s the Swedish Central Bank Prize for Economics in Honor of Alfred Nobel and not an original-issue Nobel Prize. But if nobelprize.org considers it a Nobel Prize, then so do I. It’s not fake, Matt, it’s real.

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