U.S. Economists Win Nobel; Some Consider Prize a Mixed Blessing - TheStreet

The

Nobel Prize in Economic Sciences

winners were announced today, but the superstitious out there may consider it a mixed blessing.

Sure, the award bestows wealth and fame to the winner -- a $915,000 purse and the most coveted feather in an economist's cap -- but since it was first awarded to Ragnar Frisch and Jan Tinbergen in 1969 for their analysis of economic processes, many prizewinners have experienced fiscal bad luck, high-profile mishaps or economic trends that undermined the cherished notions that won them the prize in the first place.

This certainly shouldn't dim the elation felt by this year's winners.

The Royal Swedish Academy of Sciences

, which administers the prize -- awarded for those economists who provide shoulders "on which other scholars can stand, and thus climb higher" -- named Americans James J. Heckman and Daniel L. McFadden the first recipients of the new millennium.

Heckman, 56, of the University of Chicago, and McFadden, 63, of the University of California at Berkeley, won the economics prize for developing theories and methods widely used in analyzing work and living habits.

The Selection Process

Each year, the respective Nobel committees send ballots to thousands of scientists, members of academies and university professors in numerous countries, asking them to nominate candidates for the Nobel Prizes for the coming year. These nominations must reach the committees before Feb. 1. They are evaluated with the help of appointed experts, and when the committees have made their selections a vote is taken for the final choice of Laureates. The winner is announced immediately after the vote every October.

Source: The Nobel Foundation

The prize for economics isn't without controversy. There is a school of thought that considers economics an unscientific subject. Some dismiss the prize in economics -- created by

The Bank of Sweden

68 years after the original Nobels for peace and literature were created from Alfred Nobel's will -- as a faux Nobel.

But for Nobel laureates, the prestige and fame of winning an award eclipses this side debate. "Most winners are concerned with the prestige, being the elite of the elite, and they can parlay their award into speaking engagements and burnish their reputations further," says Craig Pirrong, assistant professor of finance at

Washington University John Olin School of Business

.

As the following examples suggest, a big challenge for the lucky winners is side-stepping the post-Nobel minefield.

The Long-Term Capital Fiasco

The most spectacular example is the tale of 1997 winners Robert Merton and Myron Scholes, who shared the prize for work on the value of derivatives. Merton and Scholes developed a pioneering formula for the valuation of stock options, and their work facilitated more efficient risk management.

Merton and Scholes helped establish the

Long-Term Capital Management

hedge fund with Wall Street bond trader John Meriwether and former

Federal Reserve

vice chairman David Mullins. The hedge fund collapsed in September 1998 and came dangerously close to causing a catastrophic failure of the global financial system. The fund lost over $2.5 billion dollars and was eventually bailed out by the

Federal Reserve

.

"Long-Term Capital Management is almost a modern-day Icarus story," Pirrong says. Merton and Scholes won the award for the immediate relevance of their work, but when they tried to put their theory into practice it had catastrophic consequences. "Most economists don't take their theories and test them in the real world like that," he says.

An Award for the Euro

Sometimes, timing is everything.

As is often the case with prestigious prizes, political or economic stances can seep into choices. Last year, when

Columbia University

economist

Robert Mundell won the award, some people interpreted the choice as a vote for the euro.

In his long, distinguished and, at times, controversial career, Mundell has made a name for himself -- and made himself a hero of the economic right -- as a proponent of supply-side economics and tax-cutting. He also gained fame as the godfather of the euro, with his analysis paving the way for the single European currency.

When he was awarded the Nobel Prize, the euro was hovering at about $1.08. Since then, it has been in an uninterrupted decline, trading today at about 87 cents. (Mundell didn't participate in the planning of the euro's launch.)

For his part, Mundell still believes in the euro. In fact, he recently converted some of his winnings into euros after the currency slipped below 90 cents.

A Prize Too Soon

Robert Lucas was the 1995 winner, but in retrospect, he might have preferred being passed over that year.

He had to give half of his $1 million prize to his ex-wife, Rita, who had put in a divorce settlement seven years before that she would receive 50% of a Nobel Prize award won before Oct. 31, 1995. If the Nobel Foundation had waited another three weeks, Mr. Lucas would have been $500,000 richer.

Financial Engines

Still, turning theory into practice has worked out for some Nobel laureates.

Financial Engines, a Web service that assesses and advises individual investors on their investment goals, has been a winning venture for its chairman, William Sharpe, a professor of finance at

Stanford University

who shared the Nobel in 1990 with Harry Markowitz and Merton Miller for their work on risk and expected return of investments in efficient markets.

Sharpe has successfully translated his research into a business that has raised a total of $120 million in venture capital through five rounds of funding since its launch in spring 1996.

"You tell us

about your investments and how much you plan to retire on, and we'll forecast your chance of meeting your goals," says Sharpe. "We are calculating the risk and expected return of your investments if markets are efficient."