ST. LOUIS — Three economists were awarded the Nobel Prize Monday for their research into financial crises, including a Washington University professor whose work on bank runs has become a foundation in the field of economics.
Winners were recognized for articles published in the early 1980s that helped shape the way economists think about banks and their role in times of financial disaster.
Philip Dybvig, a professor at Washington University, and Douglas Diamond, a finance professor at the University of Chicago, received the Nobel Prize in economics for a paper they co-authored on bank runs, when depositors believe a bank is about to collapse, and en masse Withdraw money.
You received the award along with Ben Bernanke, who chaired the Federal Reserve during the Great Recession. Bernanke was honored in 1983 for a thesis on the role of banks in the Great Depression.
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Dybvig and Diamond’s paper cast bank is not just a symptom of economic damage, it is a contributor. The work looks at the instability they cause and the role of protections such as deposit insurance.
“Before that, people largely viewed bank runs as manias or psychological phenomena,” Dybvig said in an interview on Monday. But bank runs are based on rational fears, and with appropriate measures, they could be prevented.
The “Diamond Dybvig model” has become one of the basic frameworks taught to business students about financial institutions, said Gaetano Antinolfi, an economics professor at Washington University. The ideas in the paper spawned “a colossal literature,” he said.
Dybvig, 67, grew up in Kettering, Ohio, outside of Dayton. He received a bachelor’s degree from Indiana University, where he majored in mathematics and physics. He said he chose the school partly because of its music program – Dybvig is a classically trained pianist and still enjoys playing the blues and jazz on the keyboard. He then earned a master’s degree and a Ph.D. from Yale University.
The Journal of Political Economy published the Nobel Prize-winning work in 1983, when Dybvig was in his late 20s.
Dybvig joined Washington University’s Olin Business School in 1988. He said Robert Virgil Jr., then the dean of the business school, played a big part in getting him to St. Ludwig.
It has been suggested over the years that the much-cited paper on bank runs could receive a Nobel Prize, Dybvig said. But winning the award with Bernanke “taking what academics were doing and using it to lead the country through some really tough times” was a welcome surprise, he said.
Bernanke’s paper showed that the banking crisis both contributed to the Great Depression and prolonged the downturn.
“People didn’t see the financial system as an important part of the business cycle, an important part of what drives the economy,” Bernanke said Monday at the Brookings Institution, a nonprofit public policy organization in Washington. “As a professor told me when I delivered this paper, ‘The financial system is just a veil. It just tells you who owns what.’”
The Nobel Prize was awarded to 26 people from Washington University – most in the fields of physiology and medicine. Dybvig is the second to receive the business award. The late Douglass North, a professor at Washington University, shared the 1993 Nobel Prize in Economics with Robert Fogel, an economist at the University of Chicago.