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2019 | OriginalPaper | Chapter

1. Nobel Prize in Economic Sciences: The Role of Financial Studies

Authors : Gianfranco Vento, Paola Vezzani

Published in: Frontier Topics in Banking

Publisher: Springer International Publishing

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Abstract

This chapter analyzes the influence of Nobel Prize-winning financial theories on strategic and managerial decisions relating to financial markets and intermediaries. As the study explains, the Royal Swedish Academy of Sciences has been responsible for selecting Nobel laureates in economic sciences since 1969. In these 50 years, 81 academics have been awarded the Nobel Prize in Economic Sciences, and the Royal Swedish Academy has awarded the prize to pure economists, experts in finance, and scholars investigating topics on the borderlines between economics and finance. The chapter provides a brief introduction to this important prize and its origin and then analyzes the fields and research in financial economics which have received it. The core part of the chapter investigates the decisions of the Royal Swedish Academy, with a special focus on the financial theories selected for the prize, in order to highlight the contributions of the Nobel Prize-winning academics to the development of the most accredited financial theories and practices.

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next chapter Risk and Pricing on the Italian Minibond Market

See Lichtman (2017).

See “Alfred Nobel’s Life and Work – For Grade schoolers”. Nobelprize.org. Nobel Media AB 2014. Web. 6 May 2018. http://www.nobelprize.org/alfred_nobel/biographical/articles/life-work/gradeschool.html; Nils Ringertz: “Alfred Nobel – His Life and Work”. Nobelprize.org. Nobel Media AB 2014. Web. 6 May 2018. http://www.nobelprize.org/alfred_nobel/biographical/articles/life-work/.

See Lindbeck (1985).

Curiously, some of them include Daniel Bovet as the Nobel Prize winner in medicine; in fact, according to the indications given on the Nobel Prize website, Bovet is ascribed to Switzerland, despite receiving the award as an Italian citizen.

On this diatribe also see Eichner (1983) and Zahka (1992).

See for these figures: https://www.nobelprize.org/nobel_prizes/lists/laureates_ages/all_ages.html.

Harvard University (1636), Yale University (1701), University of Pennsylvania (1740), Princeton University (1746), Columbia University (1754), Brown University (1764), Dartmouth University (1764), Cornell University (1865).

See Zahka (1992) for an overview of this information from 1969 to 1989.

To be honest, Tobin was not the first to measure the value of a diversified portfolio. This is credited to Markowitz, and Tobin merely used this idea to solve a puzzle in Keynesian theory and explain why people hold money.

See Stigler (1971).

Sixteen years later, in 2008, the Nobel Committee seemed to reverse itself when the Nobel Prize went to Paul Krugman for applying the concept of economies of scale to international trade.

In the household savings function, intergenerational bequests are significant, as the increase in income unquestionably increases the propensity to save, making the disposable income exponentially influential on this function; moreover, retired people, those who according to the life cycle should erode their provisions, seem to have a propensity for positive accumulation and an aversion to consumption. It is also necessary to reconsider the theory of the life cycle with reference to the decline in household savings, which occurred from the 1990s till today.

A peculiar point was the answer of a Modigliani’s interview where he said: “The theorem, which by now is well known, was proven very laboriously in about 30 pages. The reason for the laboriousness was in part because the theorem was so much against the grain of the teachings of corporate finance—the art and science of designing the ‘optimal capital structure’. We were threatening to take the bread away, and so, we felt that we had to give a “laborious” proof to persuade them. Unfortunately, the price was paid by generations of students that had to read the paper; I have met many MBA students that remember that paper as a torture, the most difficult reading in the course. It’s too bad because, nowadays, the theorem seems to me to be so obvious that I wonder whether it deserves two Nobel Prizes. All that it really says is that (with well-working markets, rational-return-maximizing behavior for any given risk, and no distorting taxes) the value of a firm—its market capitalization of all liabilities—must be the value of its assets” (Samuelson and Barnett 2007).

Sharpe submitted the paper describing CAPM to the Journal of Finance in 1962. However, ironically, the paper which would become one of the foundations of financial economics was initially considered irrelevant and rejected. Sharpe had to wait for the editorial staff to change before he finally got the paper published in 1964.

Though ineligible for the prize because of his death in 1995, Black was mentioned as a contributor by the Swedish Academy. See Press Release of the 1997 Nobel Prize (https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1997/press.html).

A further theme can be mentioned when explaining the 1997 Nobel Prizes. In finance there are two fields, quantitative and corporate, which, although belong to the same subject, deal with different themes. These two fields seem to meet when it comes to assessing the equity of a company. In fact, the Black-Scholes-Merton Model, developed for option pricing, represents an alternative to the discounted-cash-flow model, in particular to explain why distressed companies, i.e. companies nearly close to default (debt value close to asset value), present a positive equity. In this context, the company’s equity is handled as a call option, with all the limitations and implications that this entails.

See Buffett (2009), p. 19.

See da Rold (2009).

As has been the case for other seminal works by Nobel Prize laureates, the paper, written in 1966–1967, found a home only after a fairly protracted struggle by its author. In fact, it was rejected in turn by the American Economic Review, the Review of Economic Studies, and the Journal of Political Economy. The first two rejections were on the grounds of triviality, the last was because the argument Akerlof had advanced was, in the view of the Journal’s referee, simply wrong. The paper was subsequently accepted and published in the Quarterly Journal of Economics in 1970. See Vane and Mulhearn (2005), p. 293.

See Shiller (2007).

See Karp (2012).

The big breakthrough came with the possibility of applying, on a large scale, Black and Scholes Model to compute the value of an option. Since that moment traders, who were really disoriented on how to evaluate these new financial instruments, had a common standard and exchanges exploded. The trader was an expert in finance, very able to understand and manage complex risk assessment models, and then he/she (the trader) began to work in harmony with the so-called quants. Following the example of Black and Scholes, finance became a field of application of high math applications once closer to physics. See for more details Onado (2017), p. 122.

See Tobin (1984), p. 14.

See Karier (2010).

Minsky devoted his career to proving how debt crisis are a recurring and exogenous phenomenon in market economies. See on this topic Onado (2017), p. 192.

See Karier (2010).

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Title: Nobel Prize in Economic Sciences: The Role of Financial Studies
Authors: Gianfranco Vento
Paola Vezzani
Publisher: Springer International Publishing
Book: Frontier Topics in Banking
Print ISBN: 978-3-030-16294-8

Electronic ISBN: 978-3-030-16295-5

Copyright Year: 2019
DOI: https://doi.org/10.1007/978-3-030-16295-5_1