So, that’s the 2020 Nobel Prize season wrapped up for another year.
Here’s our news story on Paul Milgrom and Robert Wilson’s success today....
And here’s a reminder of all this year’s winners, for medicine, physics, chemistry, literature and peace:
Congratulations all! GW
In a rather lovely development, Paul Milgrom has told Reuters that Robert Wilson woke him up this morning to tell him their shared happy news:
Milgrom told Reuters that Wilson, who lives across the street from him in Stanford, California, came to knock on his door in the pre-dawn hours to tell him of their shared award because his phone had been on silent mode so he could sleep.
Milgrom played down the winner’s curse, saying the main thing was to be aware of it.
Asked to cite an example of a client not understanding or trusting a novel auction approach, he said:
“Well, if you take a look, for example, we had proposed a design for the C-band auction, the auction of radio spectrum for use in 5G. It was proposed to the Federal Communications Commission, and they decided to do something more traditional instead. So that’s just an example.”
Even with all the data available today, bidders are often paying for uncertainty, Milgrom said.
“For example, if you were if you were bidding for oil on some tract and you don’t know how much oil is down there. The data isn’t going be available until you’ve drilled or if you’re bidding for radio spectrum and you want to know the value of it, it depends on what future demand is going to be or what’s going to happen with future technology.
“You have to make estimates of that that are only roughly guided by the data. If your estimates are wrong, you’re subject to the winner’s curse,” Milgrom said.
Here’s the FT’s take on why they won..
Mr Wilson showed why rational bidders tended to place bids below their own best estimate of the common value — because they were worried about the “winner’s curse” of paying too much and losing out, the committee said.
Mr Milgrom formulated a more general theory of auctions that allowed for calculating both common values and private values that vary from bidder to bidder.
Correction: This year’s prize is worth 10 million Swedish Krona - not 9m as I wrote earlier (now corrected).
Apologies, I’d forgotten it went up this year.
That’s worth $1.1m, or roughly $550,000 each for Paul Milgrom and Robert Wilson. Well worth being woken up early for, even if - as Wilson points out - it’s harder to spend during a pandemic.
The official announcement
Today’s announcement is a double win for Stanford, as both Paul Milgrom and Robert Wilson are based there.
It’s also yet another success for America -- as both men were born there:
- Paul R. Milgrom, born 1948 in Detroit, USA.
Ph.D. 1979 from Stanford University, Stanford, USA. Shirley and Leonard Ely Jr. Professor of Humanities and Sciences, Stanford University, USA.
- Robert B. Wilson, born 1937 in Geneva, USA.
D.B.A. 1963 from Harvard University, Cambridge, USA. Adams Distinguished Professor of Management, Emeritus, Stanford University, USA.
The official citation explains that:
This year’s Laureates, Paul Milgrom and Robert Wilson, have studied how auctions work. They have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies. Their discoveries have benefitted sellers, buyers and taxpayers around the world.
People have always sold things to the highest bidder, or bought them from whoever makes the cheapest offer. Nowadays, objects worth astronomical sums of money change hands every day in auctions, not only household objects, art and antiquities, but also securities, minerals and energy. Public procurements can also be conducted as auctions.
Using auction theory, researchers try to understand the outcomes of different rules for bidding and final prices, the auction format. The analysis is difficult, because bidders behave strategically, based on the available information. They take into consideration both what they know themselves and what they believe other bidders to know.
Robert Wilson developed the theory for auctions of objects with a common value – a value which is uncertain beforehand but, in the end, is the same for everyone. Examples include the future value of radio frequencies or the volume of minerals in a particular area. Wilson showed why rational bidders tend to place bids below their own best estimate of the common value: they are worried about the winner’s curse – that is, about paying too much and losing out.
Paul Milgrom formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder. He analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding.
Over time, societies have allocated ever more complex objects among users, such as landing slots and radio frequencies. In response, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue. In 1994, the US authorities first used one of their auction formats to sell radio frequencies to telecom operators. Since then, many other countries have followed suit.
“This year’s Laureates in Economic Sciences started out with fundamental theory and later used their results in practical applications, which have spread globally. Their discoveries are of great benefit to society,” says Peter Fredriksson, chair of the Prize Committee.
Q: What will you use the prize money for, now you’ve bought the ski boots already?
Robert Wilson replies that he can’t do much travelling with it during the pandemic. [reminder, his share is 5m krona, or around $560,000].
Probably I’ll just save it for my wife, my children.
We have a phrase... “you put it in a sock”. Save it, and wait for another time.
And that’s the end of the call, so we can let the Wilsons celebrate the win.
Q: how has the internet changed the world of auctions?
It’s changed it “very profoundly”, Robert Wilson replies. Thanks to the Internet, auctions are run on a continual basis by various enterprises.
He cites the sale of adverts on search engines, and public auction formats like eBay (those ski boots!).
But he also cites the “profound impact” in financial trading - where there are many venues to buy and sell assets, and they’re all tightly integrated over the Internet. That’s giving essentially instantaneous trading in financial markets.
Wilson: Not a big participant of auctions myself....
Robert Wilson is on a rather crackly phone now (he’s based at Stanford University in California, where it’s 3am!)
Q: How are you feeling about your win?
It’s very happy news, We’re very glad about it.... It’s very early in the morning here.....
Wilson adds that he’s not thought about how he might celebrate.
Q: What was the last thing you bought in an auction, and what was the biggest problem you solved with an auction?
I’ve never actively participated in an auction personally, Wilson admits with a chuckle, eliciting some giggles back in Stockholm too.
But... he then points out that we’re all on the receiving end of auctions every day.
There are some things that are implicit, there are auctions all around us, Wilson explains.
It you look at an advertisement from a search engine - that advertisement was probably sold at an auction
It’s something that you encounter a lot, but I’m not myself much of a participant in auctions.
Fortunately, Mrs Wilson is on hand to help....
My wife points out to me that we bought ski boots on eBay. I guess that was an auction.
The Academy then produce a picture of Edvard Munch’s The Scream.
Not, as you might expect, to sum up 2020. But as an example of how items have private values, as well as common value components.
If you were planning to bid for a piece of art, the Academy explain, you might think about the resale value - but you’d also include your own ‘private value’. Effectively, whether you’d like to have it hanging over the mantlepiece.
Most auctions have private value components, as well as common values...and in the early 1980s, Paul Milgrom began analysing them.
His research can help to rank all standard auction formats in terms of their expected revenues. And also factors in things we see in practice - like sellers sharing information with bidders.
The Academy says:
The auction theory developed by Paul Milgrom and Robert Wilson has been instrumental when designing new and complex auction formats....and implemented all around the world -- to sell radio spectrum, fishing quotas, airport landing slots and electricity allowances.
In the 1960s, Robert Wilson began to investigation auctions with a common value - one that is unknown beforehand, but is the same to all bidders, the Academy continues.
That could be bidding for fishing quotas - where the value is determined by not only the quota, but the future value of the fish. Bidders need to estimate that value, so they could potentially overpay.
This is something known as the Winner’s Curse.
Robert Wilson’s research helps to explain how rational bidders in common value auctions should place their bids so they maximise their own expected value, while “avoiding being struck by the Winner’s curse”.
Auctions are everywhere. People use auctions to buy and sell items on internet sites, explains the Royal Academy.
Electricity markets are organized as auctions. Financial assets, CO2 emissions allowances and radio spectrum are all organised as auctions.
But people’s motivations in auctions vary.
Some sellers want to maximise revenues but others have other objectives - using auctions as a tool, perhaps to reduce emissions or maximise public value.
The auction theory provided by Paul Milgrom and Robert Wilson is key for understanding how these objectives can be reached.
And the winners are.....Milgrom and Wilson
The 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Paul R Milgrom, and Robert B Wilson.
They are being recognised for their work on auction theory, and the invention of new auction formats....
The announcement is underway, at the Royal Swedish Academy of Sciences in Stockholm.
Göran K. Hansson, general secretary of the Royal Academy, says this year’s award is for auctions.....
Watch the announcement live.....
Three years ago, the economics prize was behavioural economist Richard Thaler, who pioneer the ‘nudge theory’.
Thaler joked that he would spend the 9m krona prize “as irrationally as possible”, but also had these encouraging words for those of us who never came top of the class....
I wasn’t a great student. My thesis advisor famously said that, when interviewed about my time at graduate school, ‘We didn’t expect much of him’.
Data analytics firm Clarivate has also produced a list of economic professors who could win today, based on academic citations. All based in the USA, they are:
- David A. Dickey of North Carolina State University, Wayne A. Fuller of Iowa State University, and Pierre Perron of Boston University.
Dickey and Fuller for statistical tests of a unit root in time-series analysis and
Perron for the statistical analysis of non-stationary time series
- Claudia Goldin of Harvard University
For contributions to labor economics, especially her analysis of women and the gender pay gap
- Steven T. Berry and James A. Levinsohn of Yale University, and Ariel Pakes of Harvard University:
For their BLP random coefficients logit model for demand estimation
Could we get a third woman winner?
Swedish news site The Local has rounded up some of the possible winners of the Nobel economics prize:
American Claudia Goldin, whose research has focused on inequality and the female labour force, is one of the favourites to become the third woman to receive the prize.
Another likely contender is her compatriot Anne Krueger, formerly the number two, and briefly the managing director, at the International Monetary Fund (IMF), who has studied rent-seeking and is a free trade activist.
But there are plenty of other contenders too, they add...
American Paul Milgrom, 72, together with compatriot Robert Wilson, 83, are once again predicted as favourites for their work on commercial auctions.
Israeli-American Joshua Angrist, a professor at the Massachusetts Institute of Technology in the US, has also been proposed for research into the impact of factors such as class size and study length on academic success and the labour market.
Other pioneers of “natural experiments”, such as the Canadian David Card, could be given the nod together with him.
Israeli economist Elhanan Helpman and American Gene Grossman, specialists in international trade, are also often mentioned as favourites.
Nobel prize for economics: a preamble
It’s nearly time to learn which esteemed economist(s) are being recognised for their pioneering work in the so-called “dismal science”.
Over in Stockholm, the Royal Swedish Academy of Sciences is preparing to award the 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The announcement is due in about 35 minutes....
And while not technically a Nobel Prize, it’s still a hefty award -- handed out every year since 1969, to 81 individuals (it can be shared by up to three living people).
Last year, Esther Duflo became the youngest winner -- and only the second ever woman (following Elinor Ostrom in 2009).
As well as the glory, the winners will share 10m Swedish krona (roughly £860,000).
They’ll also find that their views on many issues, not simply their prize-winning work, will be in more demand.....
While millions of UK workers face jobs uncertainty, some senior bankers have been seeing out the lockdown in luxurious holiday homes abroad.
But not for long! The Financial Times reports that City of London’s top banks are clamping down on staff who have been working from overseas villas since the pandemic forced offices to close.
Even those who returned to their home countries could be hauled back to the UK, even if they’re not allowed back to their desks. Why? Tax reasons, apparently!
Senior executives at several large US and European banks confirmed that they were taking a tougher line on the hundreds of staff who began working thousands of miles away because of Covid-19, either to be closer to family or to wait out lockdowns in their more spacious holiday homes.
The main driver for getting people back to the UK is concern about the tax and regulatory consequences of having staff in other countries for an extended period of time. Some banks have summoned their people back to the UK, even if they do not have to come into the office.
Renáta Ardous from accountancy firm Mazars said employees who relocated could be considered to have a “permanent establishment” in the country they were working from, exposing the employer and employee to tax in the host country.
London’s stock market has begun the new week quietly.
The FTSE 100 index of blue-chip shares has dipped by 8 points to 6007, having closed at a three-week high on Friday night.
Jet engine maker Rolls-Royce continues to bounce back, up another 5% this morning. They’ve now nearly doubled in value this month after agreeing a £5bn rescue package.
But the prospect of further Covid-19 restrictions in the UK, and rising unemployment, is hurting other companies. Hotel operator Whitbread has dipped 1.7%, and high street retailer Next is down 2.8%.
Bank of England: Are you ready for negative interest rates?
Faced with a troubled economy and rising unemployment, the Bank of England has asked Britain’s commercial banks if they are ready for interest rates to be cut below zero.
The BoE (which expects unemployment to surge from 4% to 7.5% by the end of the year) has written to the banks today to check on their preparedness for negative rates.
The BoE wants an answers by 12 November, as it continues to weigh up the merits of cutting Bank Rate (currently 0.1%) to zero, or below.
In the letter, deputy governor Sam Woods asks whether there are technical hurdles to negative rates - and if the banks have any ‘workarounds’ lined up:
“As part of this work, we are requesting specific information about your firm’s current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these.
“We are also seeking to understand whether there may be potential for short-term solutions or workarounds, as well as permanent systems changes.”
The BoE revealed last month that its Monetary Policy Committee had been briefed on its work on negative rates. Governor Andrew Bailey says is a possible tool in its arsenal:
Banks wouldn’t necessarily impose negative rates on small savers (just imagine the outcry!). But they could bill large depositors, such as wealthy clients and corporate customers.
The Mail on Sunday reported yesterday that UK bank IT systems can’t handle an interest rate below zero - so some frantic reprogramming may be needed.
As the MoS put it:
Industry figures are understood to have warned Bank officials that their systems cannot currently cope with a zero or negative value for interest rates, as they were designed only for positive values.
So it would take weeks – and vast sums of money – to upgrade their computers.
BA chief departs over job cuts row
Anger over job cuts has forced British Airways’ CEO to step down this morning.
My colleague Mark Sweney explains:
Alex Cruz has stepped down as chief executive of British Airways in the wake of heavy criticism of the handling of 12,000 job cuts at the airline.
Cruz will be replaced by Sean Doyle, the chief executive of Aer Lingus. Doyle will also take over Cruz’s role as non-executive chairman of BA after a transition period. Both carriers are part of airline group IAG.
Last month, Cruz was forced to defend the airline’s job cuts strategy, dubbed “fire and rehire” by unions which said it was a plan to push the 30,000 employees who still have jobs on to downgraded terms and conditions.
Speaking to a committee of MPs, which called British Airways a “national disgrace”, Cruz said the airline was in a “fight for survival” and that he regretted “that way too many loyal and hardworking colleagues are having to leave the business”.
Many small UK businesses fear that they might not survive the Covid-19 pandemic, according to a survey from legal firm Fladgate today.
It found that a fifth of SMEs consider their business to already be in distress, with a further 64% just about surviving on current support measures.
The coronavirus is disrupting supply chains, causing devastation to sales and sending debts soaring, Fladgate warns. One solution, they argue, is to give investors tax relief if they invest in a distressed business.
Jeremy Whiteson, partner at Fladgate, says:
“This should be seen as a loud Mayday call by UK SMEs. As the bedrock of the UK’s economy, any recovery plan must address the needs of these firms.
“Government support cannot and will not continue forever. Private investment, therefore, presents a long-term and sustainable solution for troubled SMEs. As government support schemes draw to a close, private investors provide not only critically needed capital but invaluable guidance and support as businesses look to recover financially.
IPPR: UK job support scheme is flawed.
The IPPR is urging UK chancellor Rishi Sunak to restructure his job support schemes, or see 1.8m people lose their jobs.
The IPPR thinktank has calculated that the current programmes only protect one of every ten positions currently at risk.
They say that the £1,000 bonus available to companies who bring an employee off furlough (and keep them until January) won’t actually help, in most cases.
The key flaw in the schemes identified by the research is that only a narrow set of workers earning between £625 and £987 a month would be expected to benefit. Those who fall below the lower bound do not qualify for the Job Retention Bonus and the bonus is too small to be an incentive to keep workers earning above the higher band. This means only about one in ten workers currently on furlough could benefit from the current job support schemes, according to IPPR.
Carsten Jung, IPPR Senior Economist, says that the government should reshape its support -- and provide a monthly payment for workers brought back part-time.
“It is shocking how narrow the range of workers is who would benefit from the current government schemes. Overall, nine in ten jobs at risk will not be saved by the schemes, at great and wider economic cost.
“A design change to employment support schemes could save hundreds of thousands of viable jobs and hugely improve value for money. It would target resources at those firms that truly need it rather than paying out money to all firms that used job support schemes at some point – including those that are now doing fine or even profited from the pandemic.
The Institute of Public Policy Research, another leading think tank, also fears that UK unemployment could head towards 3m soon.
They, like the CEBR, don’t believe Rishi Sunak’s latest moves will protect many of the jobs most at risk.
The IPPR is warning of nearly three million job losses. It adds that almost two million people of the three million people presently on furlough had been working in viable roles — that is jobs that are likely to return once Covid-19 restrictions are lifted.
The government’s jobs support schemes will preserve only about 230,000, meaning that just under 1.8 million viable jobs are still at risk.
The performing arts are particularly vulnerable to the looming surge in unemployment, with live theatre performances and concerts are still thwarted by Covid-19.
The CEBR explain:
On Wednesday, Parliament square was filled with 400 musicians, playing parts of Holst’s ‘Mars’, a thunderous and foreboding composition. The performance was part of a musical protest to raise awareness of the hardship that freelance musicians face amid the coronavirus pandemic. They have been hit particularly hard by the virus, which makes live music events almost an impossibility, threatening the livelihoods of venues, musicians and other people working in the industry.
Many performing artists feel let down by the government with the support for the creative sector doing relatively little for the bulk of musicians and the brooding atmosphere created by the performance in Parliament Square foreshadowed fears about jobs and livelihoods beyond the creative industries.
Introduction: UK jobless total heading towards 3m
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Britain faces a surge in unemployment before Christmas, economists fear, as business struggle under lockdown restrictions and the government prepares new rules for areas where Covid-19 is the biggest threat.
The CEBR thinktank is warning this morning that at least 1.25 million more people are at risk of losing their jobs by Christmas, as it hikes its Christmas unemployment forecast.
With Covid-19 still battering the economy, more companies will be forced to lay staff off - particularly those who were furloughed since the lockdown.
As CEBR warns...
The job market outlook is negative for the coming months...
...the coming winter looks set to be a tough one.
That would push the jobless total towards three million - up from 1.4m this summer. It would drive the unemployment rate over 8% - for the first time in almost a decade.
The CEBR has calculated that 1.2m furloughed workers are at risk being laid off when the scheme expires at the end of the month, and that a further 300,000 are likely to be made redundant.
Worryingly, the CEBR doesn’t believe the government’s latest initiative -- a new local furlough scheme for the hospitality industry announced on Friday afternoon -- will make a major difference. It might save 250,000 jobs - or one-in-six of those at risk.
The newly announced furlough scheme is well targeted to soften the blow for businesses in the hospitality sector which now seem most at risk from another shut down. However, from March/ April we know that there are a range of economic knock-on effects from lockdowns and not all businesses in need will find that they are eligible.
So while the scheme is an important lifeline for pubs and restaurants, our rough-and-ready estimates show that it will save at most 150,000 - 250,000 of the 1.5m jobs we estimated will be lost by Christmas.”
That will worry employees across the UK, especially those who could find themselves on the sharp end of a new three-tier system of Covid-19 restrictions.
The EY Item Club is also warning that unemployment will spike in the coming months -- even though it’s less pessimistic about this year’s recession.
After strong growth in July-September, the EY ITEM Club now expects the economy to contract 10.1% in 2020, up from the 11.5% contraction forecast in the Summer.
The strong Q3 performance was driven by consumer spending and the release of pent-up demand as COVID-19 restrictions were relaxed.
However, these effects will wane heading into Q4, while the economy will also face the end of the furlough scheme and likely higher unemployment, tighter COVID-19 restrictions and uncertainties around the future of the UK-EU trading relationship.
Also coming up today.
It’s Nobel Prize for Economics day!
Now, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel isn’t technically a Nobel Prize - being created decades later by Sweden’s central bank, and awarded by the Royal Swedish Academy of Sciences in Stockholm.
But it’s still the biggest gong in the economics world, having been won by many of the discipline’s leading lights - from Jan Tinbergen and James Tobin to Elinor Ostrom and Angus Deaton.
Last year, Esther Duflo, Abhijit Banerjee and Michael Kremer were recognised for their work on alleviating global poverty.
Plus, the International Monetary Fund and the World Bank’s annual meeting is taking place, virtually, this week - under the shadow of the worst slump in decades due to Covid-19.
Today, ECB President Christine Lagarde and IMF European Department Director Alfred Kammer will talk abut the need for ‘structural transformation’ to improve the economic landscape after the pandemic.
- 7am BST: China car sales for September
- 10.45am BST: Sveriges Riksbank Prize in Economic Sciences announced
- 12pm BST: ECB’s Christine Lagarde and IMF’s Alfred Kammer discuss the post-pandemic economic landscape