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 considers it a Nobel Prize, then so do I. It’s not fake, Matt, it’s real.


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Fama winning–now that would have been ironic.

Ostrom and Williamson, not so much. And well-deserved for their actual work.

Posted by Donald A. Coffin | Report as abusive

Ummm (this is the trendy way to start posts and comments now. Both Krugman *and* DeLong do it regularly).


They do *not* seem to consider it a Nobel Prize, here:

They simultaneously point to the difference and “link” the econ prize to the others in a vague way. The question is:


I was going to remind you that the economics Nobel is not a real Nobel until you Update.

Nevertheless, it is time to remove any notion of Nobel to economics. Because it is beyond a dismal science. It is simply not science. It is politico-finance astrology.

Name it the Swede Bank Prize. This way, nobody cares.

Posted by The Real Deal | Report as abusive

The Economics Nobel [or Swedish Bank prize if you like] seems to have been giving out on the same basis as the Peace Nobel: Hope.

Ostrom in particular is famed chiefly for giving academic respectability to the idea that the “tragedy of the commons” is not so tragic after all. This is something people just now very much want to hear.

Felix, get a sense of humor!

Since you want to pretend to be all serious about this:

-Odds are nothing more than probabilities, potential outcomes of an unknown event.
-Fama’s theories argue that markets are the best accumulation of information, as reflected in prices.
-Ostrom & Williamson were 50 to 1, were the long shots (cheapest.
-Fama, at 2-1, had the best odds (most expensive).
-Fama was therefore the favorite to win (even at 2 to 1 odds).

Hence, the irony!

If you don’t think its ironic that the best odds to win, as forecast via prediction market voting, was a person who, well, advocates why markets are the best represent the total known information about a given subject, who actually lost to a very long shot (whose work is not exactly an endorsement of EMH), well then you, along with Ms. Morissette, are the ones who are irony impaired!

Barry, I said in my blog that Fama was the favorite. But there’s no irony there. If he were a 100-to-1 long-shot favorite, would you still think it ironic if he didn’t win?

And there WAS NO “forecast via prediction market voting”. None. So stop saying otherwise!

Posted by Felix Salmon | Report as abusive

Barry Ritholtz says “Its theories argue that markets are the best accumulation of information, as reflected in prices.”

I’m with Barry. So many seemingly sophisticated finance types consistently get this wrong.

My read on EMH is that prices reflect available information and that attempts to “beat” the market are, on average and over the long run, likely to fail. That’s it.

EMH does not say that markets are somehow prescient in successfully guessing the CORRECT present value of the unknowable future cash flows that an individual investment will eventually produce. The market price is as good as any guess – though it won’t necessarily be correct.

As a (budding) economist, I have to say that the Economics Nobel is not “real,” in the sense that it is not subject to the same selection process as the three natural science Nobels. Theories unsupported by evidence regularly win the day, as do empirical techniques that may or may not have uncovered anything of importance.

This puts the Economics Nobel more in line with the Literature and Peace Nobels. It’s real, but it’s not real science.


Felix, Ladbrokes may not be a market, but its odds are not exactly plucked out of thin air. They reflect the volume of betting on a particular outcome. As any bookie will tell you, the most heavily backed horse has the shortest odds.

Of course we don’t know how many people actually bet on the Economics Nobel, so it’s possible that Ladbrokes’ odds were never tested. Or maybe the kinds of people who bet on Nobel prizes assumed that all publicly available information was already reflected in the odds, and there was no profit to be had.

PS – on the sense of humour front, I agree with Barry.

Posted by Peter Thal Larsen | Report as abusive

This is ridiculous. People give Fama a much worse rep than he deserves. First of all, lets clear up a few misconceptions. Fama did not invent the efficient markets hypothesis. It is concept with a long standing history and he is one of its strongest living components. Efficient markets theory is far from his only contribution. He is considered the grandfather of modern financial economics and has contributed seminal paper to every single major area including a doctoral dissertation about fat tailed distributions in stock returns (a phenomenon that Nassim Taleb thinks he found). He is highly deserving of this prize and the Scandinavian liberal bias of the selection committee is the reason for the obvious impossibility of his winning the prize. I am astounded that you are one these follow the crowd types that are hating on modern finance and economics.

Posted by Rishi Mohnot | Report as abusive

“Even Eugene Fama wouldn’t claim efficiency for a non-clearing market with no prices.”

But would he allow them to be carried on the bank’s books at the valuation provided by the model?

Posted by Ken | Report as abusive

actually, even though Eugene Fama is the pioneer of modern finance, it would be more fitting to give it to Fama TOGETHER with Stephen Ross. Ross’ role has been similarly important. The work of the two has greatly complemented one another. Richard Roll would not be far behind, and worked with both. They should undoubtedly receive one, although Fama and Ross (and others mentioned) should get their own, each.

Other observations:

Williamson was not unexpected. Ostrom is a curious choice, as she seems to be almost unknown in mainstream economics.

A Harvard pool is a little biased towards Cambridge.

Dougas Diamond would be another good choice for having pioneered the modern theory of banking. This year, in particular, points out the importance of this subject area. but Diamond is too young.

Posted by iaw | Report as abusive

Am I correct in saying that this year the Prize was for Economic Governance and not Applied Maths ? Now that is ironic.

Posted by Gaspard | Report as abusive