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Why give Nobels for Financial Economics?
Pablo Triana sends me an open letter he's written to the Swedish central bank, telling them to please stop giving out Nobel prizes in economics to "flawed, unworldly, and dangerous theoretical finance constructs":
At least two of the theories awarded with the Economics "Nobel" have been behind the very worst financial crises to have afflicted the world since the 1929 crash; Black-Scholes-Merton was the inspiration for the strategies that gave us October 1987´s Black Monday, the most devastating one-day drop in the history of Wall Street (which gravely threatened to sink the system); while Portfolio Theory was the inspiration for the creators and adopters of VaR, which outrageously misguided guidance and capacity for forcing destabilizing liquidations were to blame for the 1998 LTCM crisis and the current malaise (both of which, certainly, put us in great peril).
Triana has co-authored letters with Nassim Taleb in the past, and this is very much consistent with Taleb's views. It's not such a bad idea: right now it's pretty hard to say that, in aggregate, recent advances in financial economics have been, on net, a good thing. So why encourage them with Nobels?
