The odds favorite to win the Nobel, Eugene Fama, lost the prize to two other Americans, Elinor Ostrom and Oliver Williamson.
Ostrom & Williamson study the way decisions are made outside of markets, which is the focus of many other economists.
This award is a victory, in small part, for the Behaviorists, whose studies of our flawed wetware include such normal human foibles as irrationality, poor decision making, biases, non profit maximizing behavior.
Why? As we noted last night, the odds on favorite to win was the precise opposite of the behavioral economists — the father of the efficient market hypothesis, Eugene Fama. Users of his EMH have created various predictions markets. These markets had Fama the odds on 2 to 1 favorite to win the prize this year. There is no small degree of irony here, in that Fama’s Efficient Market Hypothesis, where markets reflect all information on a given event, had so much wildly misplaced optimism on this occasion.
In a case of bizarre reflexivity, if these markets had not been so bullish on Fama’s chances of winning, it would have done more to prove his theories. Instead, they gave him the best odds to win. This actually points to a major flaw in their thesis: the false belief that Humans make good decisions in groups, or that markets accurately depict the sum total of info on a given subject.
As I have argued in the past, prediction markets work best when their members mirror those of the group they are seeking to forecast. Jurors, Boards of Directors, Nobel Prize committees all are terrible groups for these markets to forecast, as their members rarely have much in common with prediction market Traders.
Perhaps the greatest irony is that Fama supporters, whose theories do such a poor job explaining bubbles and busts, were surprised by the results. Given the failure of the market itself to anticipate its own collapse, perhaps this was a very poor year to expect much in the way of recognition of the theories that supported many of the decisions that led to the collapse.
EMH proponents are apparently as tone deaf politically as they are economically.
Originally published at The Big Picture and reproduced here with the author’s permission.
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