Results for “prizes”
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Eugene Fama Nobelist

As an undergraduate Fama worked for a stock forecasting service and he was tasked with coming up with rules to make money in the market. Time and time again he would find profitable rules only to find that they didn’t work in new data or out of sample. In graduate school he started talking to Merton Miller, Lester Telser, and Benoît Mandelbrot and finally hit on the idea that in an efficient market price changes would not be forecastable. The rest is history.

Fama’s dissertation and famous 1970 review article, Efficient Capital Markets: A Review of Theory and Empirical Work made efficient markets a touchstone for modern economists and finance theorists but practitioners hated and still hate the idea. Nevertheless, test after test showed that very few mutual fund managers beat the market and those that beat the market this year are not more likely to beat the market the next year. Chance and perhaps a few, very rare, geniuses explain the data. Eventually, hundreds of billions of dollars began to flow into index funds and today index funds manage over $7 trillion dollars worth of assets worldwide, making Fama the 7 trillion dollar man. Fama’s ideas have made an enormous contribution to how people invest, saving them billions in fees which generated beautiful homes for fortunate mutual fund managers but less than nothing for their customers.

The no free lunch principle is the most robust of the findings of the early Fama/efficient markets school. Other early findings such as non-forecastability of returns have been revised. The initial finding was that returns were not forecastable and that is true for short durations but it is now clear that returns can be forecastable over longer horizons! In particular, variables such as the dividend/price ratio can predict stock return variation years in advance! (Robert Shiller pioneered many of these kinds of studies as did Campbell and Cochrane).  Fama, however, contrary to how he is sometimes represented did not reject these findings. Indeed, the less well known part of the story is that Fama working with French (e.g. Fama and French (1988a,1988b, 1993) has been among the pioneers in documenting and explaining these findings. What Fama’s later work has shown is that many of the anomalies such as time varying returns and the higher return to so-called value firms are real but they are not anomalies they are better explained as variations in risk premia tied to changes in the business cycle.

The CAPM (for which Markowtiz and Sharpe won the Nobel) suggested that the only source of true (priced) risk was risk that varied with the market return. That is one important source of risk but it’s not the only one, other types of macro risk which appear to vary with the business cycle are also priced and they are correlated with markers like the dividend/price ratio and the prospects for value and small-cap stocks. Thus, Fama showed that many of the seemingly anomalies (not all, however!) of the early efficient market tests can be better explained by a market model that incorporates more sources of risk. All of this work has really been a tour de force. It’s not often that the same person creates the theory and then participates in the first revolution overturning (some of) that theory.

Fama also pioneered the first event study! Fama, Fisher, Jensen, and Roll (1969) studied something a bit prosaic, stock splits, but the methodology, looking at how the stock market reacts to unexpected events, has seen been used to study what happens when Senators die unexpectedly (firms they support fall), what happens in close elections, which part was responsible for the Challenger space shuttle crash and many other events.

Assorted links

1. Is high brow betting on the rise?

2. And a new, difficult to figure out fantasy market for betting on Nobel Prizes, source market here, maybe you have to log in to get how it works.  Discussion from The Boston Globe of how bookies pick the odds.

3. Japan to start testing self-driving vehicles on its roads.  And all you can eat cookies, from Japan.

4. Jeremy Stein on the reach for yield and recent asset price movements, the best explanation I have heard so far (pdf).

5. Is the Indian countryside doing better than we think?

6. Ten movable bridges.

Thomson Reuters predicts the 2013 Nobel Laureate in economics

Their leading candidates are:

Joshua D. Angrist, David E. Card, Alan B. Krueger, Sir David F. Hendry, M. Hashem Pesaran, Peter C.B. Phillips, Sam Peltzman, and Richard A. Posner, all very good possible picks in my view.

My personal prediction (which never once has been correct, at least not in the proper year) is for an early “shock” prize to Banerjee, Duflo, and Kremer, in part to show (try to show?) that economics really is an actual science.

In any case the above link offers Reuters picks for the science prizes as well.  Here are some other speculations for the science prizes as well.

For the pointer I thank Michelle Dawson.

Do Awards Reduce Productivity?

FieldsGeorge J. Borjas and Kirk B. Doran find that the productivity of mathematicians who win the Fields Medal, the mathematics “Nobel” awarded to mathematicians under the age of 40, declines after they win. Borjas and Doran look at productivity on a number of margins including papers, citations, and graduate students mentored. At right is a graph of average number of papers compared to a contender group. Productivity falls by a statistically significant ~1 paper per year (in the regression that I think the strongest, in a few variants the decline is a bit more.)

Not all of the decline is due to resting on laurels. Borjas and Doran also find that mathematicians who win the Fields tend to branch out into other areas and this branching out requires them to learn new material which takes time. Steve Smale did work in economics and biology, for example, Rene Thom developed catastrophe theory and David Mumford works in vision and pattern theory. Exploring new topics can also lead to breakthroughs so branching out is not necessarily a negative effect. Borjas and Doran estimate that about half of the productivity effect is resting on laurels and half greater exploration.

(FYI, Borjas and Doran speak of prizes but I prefer to call them awards because awards such as the Fields or Clark Medal are quite different from prizes for purpose, such as the XPrizes, the H Prize or the historically important Orteig Prize, that I discuss in Launching as alternatives to patents.)

Winning the Fields is presumably good for the winner but even taking into account the enhanced incentive to explore it’s not obviously good for mathematics. The explicit purpose of the Fields was to increase not decrease achievement. What can be done?

The Fields Medal may be too important for its own good. In economics the closest thing to the Fields is the John Bates Clark award, given to that American economist under the age of 40 judged to have made the most significant contributions. Chan et al. (2013) find that recipients of the Clark award increase their productivity after winning. But the Clark award is widely seen as a future portent of the Nobel, thus it may have a more stimulative effect as the winner realizes that the next big award is within reach (see the final sentence). In a tournament, it’s important to tier the awards for multiple levels of ability.

In thinking about whether awards increase or decrease productivity on net. the precise counter-factual is important. Let us accept as Truth that winners of the Fields Medal decrease in productivity, even so that doesn’t mean that eliminating the Fields Medal would increase productivity let alone that eliminating all awards would increase productivity (remember, the productivity of the contenders may be more important than the productivity of the winners). Perhaps the most justifiable policy recommendation is that one shouldn’t give awards to young people, a Fields Medal for lifetime achievement, much as the economics Nobel is given, might encourage more achievement.

Paul Samuelson wrote of Chasing the Bitch Goddess of Success:

Scientists are as avaricious and competitive as Smithian businessmen. The coin they seek is not apples, nuts, and yachts; nor is it the coin itself, or power as that term is ordinarily used. Scholars seek fame.

But, paraphrasing Tyler, what price early fame?

Who Will Prosper in the New World?

That is a new and short essay from The New York Times, adapted from my almost-out (Sept. 12) book, Average is Over: Powering America Out of the Great Stagnation.  Here is an excerpt from the short piece:

Your smartphone will record data on your life and, when asked, will tell you what to do, drawing on data from your home or from your spouse and friends if need be. “You’ve thrown out that bread the last three times you’ve bought it, give it a pass” will be a text message of the future. How about “Now is not the time to start another argument with your wife”? The GPS is just the beginning of computer-guided instruction.

Take your smartphone on a date, and it might vibrate in your pocket to indicate “Kiss her now.” If you hesitate for fear of being seen as pushy, it may write: “Who cares if you look bad? You are sampling optimally in the quest for a lifetime companion.” Those who won’t listen, or who rebel out of spite, will be missing out on glittering prizes. Those of us who listen, while often envied, may feel more like puppets with deflated pride.

Read the whole thing, interesting throughout.

You can order my book on Amazon here.  On Barnes and Noble here.  On here.  And from Penguin here.

Hayek in the 1930s

Paul Krugman on Hayek’s influence in the 1930s:

…back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes…

Alvin Hansen reviewing Hayek’s Prices and Production in 1933 in the American Economic Review.

The present volume is, it seems to me, the only book of recent years which at all approaches Keynes’s A Treatise on Money in the impetus it has given to renewed interest and discussion of business-cycle theory.
This in itself is high praise. Altogether aside from the soundness of its
conclusions, the value of the book and its important place in the recent
literature of cycle theory is unquestioned.

The Nobel Prize committee:

von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

To be clear, it is true that Keynes’s General Theory eclipsed Hayek but to say that Hayek was not a serious rival to Keynes in the 1930s is a Whiggish misreading of the history of economic thought.

Addendum: Don Boudreaux also comments noting that Hicks specifically referred to the great Hayek-Keynes rivalry of the 1930s. See also Greg Ransom’s citations from Hicks and Coase in the comments.

Do note that reading Hayek out of the debate diminishes Hayek but perhaps even more it diminishes Keynes who clearly won over the profession.

In praise of Bernie Sanders

This is an email from his press secretary:

I wanted to write to applaud your great piece in the NYT this weekend, and make sure you were aware of Sen. Sanders’ legislation on the issue.

During the last congress Sen. Sanders introduced a bill to create a $3 billion fund tasked with giving away prizes for drug breakthroughs.  Here’s a release for the bill and here’s a video of a hearing the senator held on it where Joseph Stiglitz, Lawrence Lessig and Jamie Love all testify in support.

I thought you might be interested.

He is referring to my piece from this Sunday.

Pandemics and public goods, and why we are failing at both

Here is my latest New York Times column, which has a specific part on how to address pandemics and a more general section on the evolving role of government in American society.  In neither area are matters running especially well.

Here is one initial point, namely that it is difficult to commit to allow high prices upfront:

Research and development grants are a way to pay potential innovators up front — an important move, as an innovator can’t always charge high-enough prices for the value of its remedies when they’re actually needed.

That will lead to institutional failure, rooted in a mix of government and market failure.  Therefore other rewards are needed, since the prospect of high prices does not adequately motivate.  I thus call for some key drugs to be rewarded with prizes and for government to buy out the patent rights, if need be:

If anyone doubted a government pledge to pay big money for the rights to remedies, the patent’s value could be established by a competitive auction. Michael Kremer, a Harvard economics professor, outlined the procedure for such an auction in his research paper “Patent Buyouts.”

The larger problem is this:

OVER all, the American government seems to be turning its back on its traditional role of producing and investing in national public goods. If there is any consistent tendency in recent government spending, it is that spending on entitlements like Social Security and Medicare — which provide mostly private benefits — is rising and that investment and spending on national public goods is falling.

Do read the whole thing.  I also suggest that (non-paternalistic) public health could be a suitable health care issue for Republicans, who presumably should be looking for alternatives to the status quo.

There are by the way two points which did not make the final cut for reasons of space.  First, the current coronavirus in Saudi Arabia has not gone away as a source of potential problems.  Second, the Bush Administration (43) did take some notable steps to return vaccine capacity to the United States, through both regulatory forbearance and HHS procurement.  These are likely good policies since in a pandemic one cannot expect to rely on free international trade in a remedy but rather export controls are to be expected.

The Tang Prize

Taiwanese businessman Samuel Yin has endowed a new science prize that not only gives bigger cash awards than the Nobel Prizes, but supports research as well. Individuals or institutions that have demonstrated what judges deem to be the most creative and influential research will receive about $1.36 million in each of four fields; an additional $341,000 will support recipient-proposed plans for research and talent development in related fields for 5 years. The combined $1.7 million tops the Nobel Prize, which for 2012 was about $1.2 million.

Announced at a press conference today in Taipei, the Tang Prize, named after China’s Tang Dynasty, which Yin admires as a golden age for Chinese civilization, will be awarded biennially for work in sustainable development, biopharmaceutical science, sinology, and rule of law.

Yin, who is endowing the Tang Prize Foundation with about $102 million, hopes “the prize will encourage more research that is beneficial to the world and humankind, promote Chinese culture, and make the world a better place,” according to a press release. Yin made a fortune in real estate, finance, and retail investments, and is worth about $3 billion, according to Forbes magazine. Academia Sinica, which oversees Taiwan’s premier research labs, will be responsible for the nomination and selection process. The first prize announcement is slated for July 2014.

The link is here and for the pointer I thank Michelle Dawson.  This goes back to a discussion I have regularly with John Nye.  If you simply put up money — say for a new prize or even for a new university, and try to spend that money well — but don’t court the traditional markers of status per se, how far can you get?

James Buchanan (1919-2013), Appreciations

James M. Buchanan Jr.Here a number of appreciations and memories of Jim Buchanan. Steve Horwitz has a good, concise summary of some of his intellectual contributions:

Buchanan’s work changed political economy in fundamental ways.  Thanks to him and his colleagues, three things are true:  No one who wishes to talk responsibly about politics can be ignorant of public choice theory. No one should ever invoke the language of market failure (including externalities) without having digested his work on government failure. And people who run around talking about the constitution better be able to understand something of his contributions to constitutional political economy.

I agree entirely with Robert Higg’s portrait:

I first encountered Jim when he came to Johns Hopkins to present a seminar paper while I was a graduate student there, in 1967, as I recall. He did not make a good impression on me then. His presentation, like all his work, was nontechnical, and Hopkins specialized in a much more formal, mathematical style of economic analysis. When Professor Bela Belassa asked him a technical question, Jim shrugged it off as if its answer didn’t matter much one way or the other. In the grad students’ minds, this attitude toward the very sorts of things we were agonizingly trying to master suggested that he was a lightweight. In this respect, we could scarcely have been more wrong.

Indeed, the hallmark of Buchanan’s work from beginning to end was a deep seriousness of purpose and procedure that not many economists have matched in the past century. Unlike the typical mainstream economist, Jim was never just fooling around, toying with a tweaked model or a trivial, throw-away idea. To a rare degree, he kept his eyes focused on the prize of true economic understanding.

…. He gave me a deeper understanding of the market process than anyone else had given me. He raised many worthwhile questions that I continue to ponder. He offered me a shining example of the economist as a serious thinker, not simply an idiot savant fooling with models.

The NYTimes quotes Tyler:

Over the years since Dr. Buchanan won the Nobel, much of what he predicted has played out. Government is bigger than ever. Tax revenue has fallen far short of public programs’ needs. Public and private borrowing has become a way of life. Politicians still act in their own interests while espousing the public good, and national deficits have soared into the trillions.

In a commentary in The New York Times in March 2011, Tyler Cowen, an economics professor at George Mason, said his colleague Dr. Buchanan had accurately forecast that deficit spending for short-term gains would evolve into “a permanent disconnect” between government outlays and revenue.

“We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society,” Dr. Cowen wrote. “As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.”

Writing in the Wall Street Journal our colleague Don Boudreaux also points to Jim’s work on the true burden of the debt–stop the we owe it to ourselves madness!  Lars Christensen looks at one of Buchanan’s many interesting ideas, the brick standard for monetary policy. Randall Holcombe remembers his teacherThe Washington Post and Bloomberg offer useful commentaries as does political scientist Tim Groseclose.

Of course you should not ignore Buchanan’s own writings which spans more than 20 volumes, 10 of which are available online. Buchanan’s classic Politics without Romance offers a short introduction as does his Nobel lecture.

Buchanan’s Nobel lecture illustrates why, even today, many other economists don’t get Buchanan. While other economists are looking for “efficiency” and “optimality” in models Buchanan had a very different concept of welfare economics.

[Buchanan]…sought to bring all available scientific analysis to bear in helping to resolve the continuing question of social order: How can we live together in peace, prosperity, and harmony, while retaining our liberties as autonomous individuals who can, and must, create our own values?

On a personal note, I was fortunate to have Buchanan both as a teacher and as a colleague. He founded the Center for Study of Public Choice that today I direct.

Buchanan wrote not for the hour or the day but for the age and his influence will continue far into the long run.

Assorted links

1. Prizes for Dubai drivers who do not commit traffic infractions, hat tip Yana.

2. The expiration of the US. assault weapons ban increased violence in Mexico.

3. How fragile are we?

4. Illinois re-confronts the Coasian problem.

5. There is structural unemployment in Chennai too, robot fortune teller.  Note the multiplicity of religions in the photo.  And note that Junior Khuppanna has excellent food from the interior of TN.

Noble Matching

In honor of the Nobel prizes to Al Roth and Lloyd Shapley, here is a primer on matching theory. Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.

The field of matching may be said to start with the Gale-Shapley deferred choice algorithm. Here is how it works, applied to men and women and marriage (n.b. the algorithm can also work for gay marriage but it’s a little easier to explain and implement with men and women). Each man proposes to his first ranked choice. Each woman keeps her top-ranked suitor but defers accepting the proposal. Each woman also rejects her lower ranked suitors. Each rejected man proposes to his second ranked choice. Each woman rejects again any lower-ranked suitors, which may include previous suitors who have now become lower-ranked. The process repeats until no further proposals are made; each woman then accepts her top-ranked suitor and the matches are made.

A similar process works when proposal receivers may accept more than one suitor, not that useful for marriage in most of the United States but very useful for when students are applying to schools and each school accepts many students.

Now what is good about this algorithm? First, Gale and Shapley proved that the algorithm converges to a solution for a very wide range of preferences. Second, the algorithm is stable in the sense that there is no man and no woman who would rather be matched to each other than to their current match. There are of course, men who would prefer to marry other women and there are women who would prefer to marry other men but no mutually preferable match is possible. Thus, the algorithm produces a stable match.

The application to men and women is somewhat fanciful, although should clearly adopt this idea!, but the application to students and schools is very real. Gale and Shapley concluded their paper by writing:

It is our opinion, however, that some of the ideas introduced here might usefully be applied to certain phases of the admissions problem.

Indeed, this is exactly what has happened. Students in New York and in Boston are now matched to schools using versions of this algorithm. Even before Gale and Shapley the algorithm had been used, without much theorizing, by doctors allocating residents to hospitals and since Gale-Shapley and Roth the idea has been used much more extensively all over the world .The algorithm, by the way, has been picked up and extended by computer scientists notably including Knuth.

I said above that the men propose to the women–this matters because when the women propose to the men you also get a stable match but it may be a somewhat different match and in general it is better to be the one proposing. Matching becomes more difficult when, as in modern times, both men and women may propose. Fortunately, in many problems, such as with students and schools, the proposers and receivers can be fixed.

Another question is whether the algorithm can be strategically manipulated. In an Impossibility Theorem with much the same flavor as Arrow’s Theorem and the Gibbard-Satterthwaite theorem, Roth and Roth and Sotomayor proved that there is always some possibility for manipulation but the G-S algorithm can be said to minimize the opportunity for strategic manipulation; in particular for the proposers, men or say students applying to schools. it is a dominant strategy to reveal one’s true preferences.

The importance of a stable matching algorithm can be seen in what happens when such algorithms are not used. In trying to allocate residents to hospitals, for example, what typically happens when a stable algorithm is not used is unraveling and chaos. Unraveling occurs when offers are made earlier and earlier in an attempt to get a jump on the competition. Prior to the currently used National Residency Matching Program, for example, hospitals were making offers to residents up to two years in advance! All kinds of chaos arose as hospitals would make exploding offers, accept now or the offer explodes! Such offers would inevitable lead to recriminations and backing out of the offers as better matches were sought.

What Roth has done is extend the Gale-Shapley algorithm to more complicated matches and to actually design such algorithms to solve real problems. In the 1970s, for example, the medical residency algorithm began to run into trouble because of a new development, the dual career couple. How to match couples, both doctors, to hospitals in the same city? By the 1990s assortative matching in the marriage market was beginning to derail matching in the doctor-hospital market! Roth was called in to solve the problem and moved from being a theorist to a market designer. Roth and Peranson designed the matching algorithm that is now used by Orthodontists, Psychologists, Pharmacists, Radiologists, Pediatric surgeons and many other medical specialties in the United States.

Most famously, Roth has worked on improving kidney allocation. I first wrote about this in 2004 (see also these posts):

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap? Let’s add in the possibility of an exchange that raises your spouse on the queue for a cadaveric kidney. And let us also recognize that even if your kidney is compatible with your spouse’s there may be a better match. Is there an allocation system that makes all donors and spouses better off (or at least no worse off) and that maximizes the number of beneficial swaps? In an important paper (Warning! Very technical. Requires NBER subscription.) Alvin Roth and co-authors describe just such a mechanism and show that it could save many lives. Who says efficiency is a pedestrian virtue?

Since that time we have seen many such swaps including this record of 60 people and 30 kidneys. Truly a noble match.

Minor editing Oct. 23.

Questions about John Cage

Wednesday will count as his 100th birthday.  Here are a few of my views:

1. Is it actually good music?

Much of it is, once you get past the gimmicks.  For direct musical listening (skip 4’33”) I recommend the piano music, most of all by Herbert Henck or David Tudor or Stephen Drury.  The important pieces have held up very well, and even the lesser pieces still are worth hearing at least once.

2. If I wish to try one important piece?

Perhaps “In a Landscape,” on this CD.

3. What if I am looking for a good sampler to reflect his diverse contributions?

Try the Barton Workshop grab bag.

4. Are you pulling my leg?


5. Is aleatory music interesting?

To me, no.

Here is Wikipedia on John Cage.  Here is John Cage on a 1960 game show, being thwarted by a union dispute.  Here is good commentary on that clip.  Here is TNR commentary on that clip.  Cage was also an expert mycologist.  Here are the Italian prizes he won for mushroom identification.  Here is the iTunes prepared piano app.

Here are good quotations from John Cage.

The real inflation problem

Competitors are said to pump air to deliberately inflate the udders before sealing the teats with superglue to stop the air or milk leaking out. The procedure gives the cattle the appearance of having full udders, an attribute believed to be desirable in show cattle. The practice, which leaves cows in “severe discomfort”, is understood to be an attempt to win agricultural prizes for their animals. Champion animals can fetch up to £100,000 at auction and are highly prized for breeding. The RSCPA has promised to investigate complaints, although no prosecutions have yet taken place.

Here is more, courtesy of Rahul.