Berkeley Economist Oliver Williamson and Indiana University Political Scientist Elinor Ostrom shared the Nobel Prize this week.
My long time favorite for the prize has been Benoit Mandelbrot. Mandelbrot’s work on the behavior of prices in markets should have helped us avoid the recent financial collapse, but until very recently his work has been give far less attention than it deserves.
The book The Black Swan by Nassim Taleb is built off of the theoretical work of Mandelbrot.
Mandelbrot makes the point that the rational actor approach to the markets ignores the “wild” nature of actual pricing in financial markets. So-called “efficient markets” advocates mistakenly apply concepts borrowed from physics to markets, ignoring the absence of phenomenon like inertia in those markets. He argues that there is a fractal structure to pricing of financial assets that could be far more powerful in explaining the apparently inexplicable nature of financial markets.
Perhaps next year as the drama of the recent collapse of our financial markets has sunk in, Dr. Mandelbrot will finally gain the recognition he deserves.
Nonetheless, I am particularly pleased to have heard of Dr. Williamson’s award. I was trained in law school in his tradition, what is known broadly as the “new institutionalism” or “new institutional economics.” Most of my research today looks broadly at the importance of institutions as opposed to simple images of arms length markets in understanding how the world works.