Investors Should Sue the Nobel Prize Committee

Sunday, October 10, 2010

Nasim Taleb: Investors Should Sue the Nobel Prize Committee (Or he will)

Nassim Nicholas Taleb is my new hero. In an interview with Bloomberg, Taleb said that the Nobel Prize committe brought legitimacy to faulty econometric methods of looking at the economy.

According to Bloomberg, Taleb singled out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.

“People are using Sharpe theory that vastly underestimates the risks they’re taking and overexposes them to equities,” Taleb said. “I’m not blaming them for coming up with the idea, but I’m blaming the Nobel for giving them legitimacy. No one would have taken Markowitz seriously without the Nobel stamp.”

“I want to make the Nobel accountable,” Taleb said today in an interview in London. “Citizens should sue if they lost their job or business owing to the breakdown in the financial system.”

“If no one else sues them, I will,” said Taleb, who declined to say where or on what basis a lawsuit could be brought. Of course, the ultimate cause of the current financial/economic crisis is Federal Reserve manipulation of the money supply, which distorts the capital/consumption ratio, but it is wacky models like that of Markowitz, Miller and Sharpe that ignore the business cycle and give many money mangers the faulty belief that the investments they are making are much safer than they actually are.

Friedrich Hayek in his great book,

The Counter Revolution of Science, explains how many economists in error attempt to mimic the physical sciences when in fact the methodology in the sciences of human action, because there are no constants, must by necessity be different.  The financial modelers, Markowitz, Miller and Sharpe, use the faulty methodology that Hayek warned about.

As for Taleb, I’m thinking he has his tongue a bit in his cheek when calling for a suit against the Nobel Committee, but it certainly drives home the point that the Committee has often bestowed legitimacy for some pretty bad economic theory. One could argue quite strongly that the only recipient of the Nobel Prize in Economics that deserved the award was Hayek. The others were all mistakes to one degree or another by the Committee. Paul Krugman being a recent obvious example of this.

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