Three Americans have won the Nobel Prize for economics for their seminal, yet simple, theories showing information has the power to distort markets for everything from soybeans to stocks.
Joseph Stiglitz, George Akerlof and Michael Spence will share nearly $1-million (U.S.) from the Royal Swedish Academy of Sciences for their pioneering 1970s contributions to economics of "asymmetric information."
Rejecting conventional economic thought that markets are always efficient, the trio theorized that some people inevitably have more information than others, setting markets off kilter.
Their work has helped a generation of economists understand and quantify market imperfections. It has also helped make the case that occasional intervention in markets by governments and other institutions is justified.
U.S. Federal Reserve chairman Alan Greenspan probably best captured the nature of their work when he complained of "irrational exuberance" reflected in a sharp runup in stocks in the mid-1990s.
But like Mr. Greenspan, who missed the market collapse by more than four years, economists continue to struggle awkwardly with the consequences of the information puzzle, in spite of the Nobel Prize winners' work. Through the late nineties, for example, investors poured dizzying sums into high-technology companies that often didn't have products or markets, starving more worthy businesses of capital and leading to an inevitable collapse in the sector.
Indeed, many economists touted the notion that the tech-led boom of the nineties was different - that productivity gains had created a "New Economy," which defied outdated analysis techniques.
"Their work was important, but [the crash]happened nonetheless," Toronto-Dominion Bank economist Don Drummond said of the Nobel Prize winners' work. "The theory was fine and probably useful, but I wouldn't say we made great use of it."
The theory of asymmetric information hasn't been incorporated into the day-to-day work of economic forecasters or policy makers, suggested Mr. Drummond, a former Canadian deputy finance minister.
"Information is the core of the economy and it's extraordinarily valuable to those that have it," Mr. Drummond added. "But not everyone gets it and it's distributed in different ways. Therefore, there becomes a price to the information."
How that relates to peoples' everyday lives, Mr. Drummond said, he isn't sure.
The Nobel Prize judges, however, suggested that the models developed by Mr. Stiglitz, Mr. Akerlof and Mr. Spence have become "indispensable instruments in the researcher's toolbox" in studying everything from Third World agricultural to modern financial markets.
Mr. Akerlof, 61, of the University of California, showed in his 1970 essay The Market for Lemons that the unequal distribution of information causes the problem of "adverse selection." The essay attempts to explain why markets such as those for used cars are charged with uncertainty and often filled with unhappy customers.
In the used car market, Mr. Akerlof said, buyers are suspicious because they are afraid of ending up with a lemon, and sellers are worried about getting a good price.
"Markets such as for used cars tend to be rather screwed up," Mr. Akerlof told The Associated Press Wednesday.
The same concept was at work in the high-tech stock bubble. At first glance, all Internet companies seemed of equal value to many investors. As a result, many poorly performing companies became overvalued, grew rapidly and flooded the market with their shares.
"When uninformed investors realize their mistake, share prices fall - the IT bubble bursts," the academy noted in a statement.
Mr. Akerlof noted that companies actively try to overcome the information quandary by offering guarantees on used cars, by branding merchandise, or by franchising a business model.
Mr. Spence, 58, a former dean of Harvard and Stanford universities, advanced the notion of asymmetric information by demonstrating ways to quantify "signalling," which happens when businesses go out of their way to boost their image.
He demonstrated how companies often elect to pay dividends, even though this penalizes shareholders at tax time, because it suggests the company's prospects are good. Shareholders are rewarded through a higher share price.
"All of us were given the award for trying to understand how markets perform when people have imperfect information," Mr. Spence told The Associated Press.
Mr. Stiglitz, 58, the best known of the three economists, is a former chief economist of the World Bank and a top White House economic adviser. He currently teaches economics at Columbia University in New York.
Also working in the mid-seventies, Mr. Stiglitz showed that less informed players can acquire information through screening. For example, insurance companies let clients assess their own risk profile by choosing between lower premiums or higher deductibles.
"It's a little bit hard for people to realize that 25 years ago, people maybe used economic models that assumed perfect information, and the work that we began 25 years ago really changed that in ways that are now so completely integrated into modern economic thinking," Mr. Stiglitz told Reuters News Agency.