When I was a PhD student in Economics at Johns Hopkins University in the early 1990s, I was lucky enough to attend the talks by two Nobel Prize Winners in Economics, one of whom had a PhD in economics from Johns Hopkins, whom I even ended up asking a question from the audience comprised mainly of faculty and students of economics at Hopkins:
1. Herbert Simon (1916 – 2001) – was an American scholar whose primary research interest was decision-making within organizations and he is best known for the theories of “bounded rationality” and “satisficing”. He received the Turing Award in 1975 and the Nobel Prize in Economics in 1978. Simon recognized that a theory of administration is largely a theory of human decision making, and as such must be based on both economics and on psychology. He states: “[If] there were no limits to human rationality administrative theory would be barren. It would consist of the single precept: Always select that alternative, among those available, which will lead to the most complete achievement of your goals.” Contrary to the “homo economicus” model, Simon argued that alternatives and consequences may be partly known, and means and ends imperfectly differentiated, incompletely related, or poorly detailed. Simon defined the task of rational decision making as selecting the alternative that results in the more preferred set of all the possible consequences. Correctness of administrative decisions was thus measured by: (a) Adequacy of achieving the desired objective, (b) Efficiency with which the result was obtained. The task of choice was divided into three required steps: (1) Identifying and listing all the alternatives, (2) Determining all consequences resulting from each of the alternatives; and (3) Comparing the accuracy and efficiency of each of these sets of consequences. Any given individual or organization attempting to implement this model in a real situation would be unable to comply with the three requirements. Simon argued that knowledge of all alternatives, or all consequences that follow from each alternative is impossible in many realistic cases. Simon attempted to determine the techniques or behavioral processes that a person or organization could bring to bear to achieve approximately the best result given limits on rational decision making. Simon writes: “The human being striving for rationality and restricted within the limits of his knowledge has developed some working procedures that partially overcome these difficulties. These procedures consist in assuming that he can isolate from the rest of the world a closed system containing a limited number of variables and a limited range of consequences.” Therefore, Simon describes work in terms of an economic framework, conditioned on human cognitive limitations. (Source: Wikipedia)
2. Merton Miller (1923 – 2000) was an American economist, and the co-author of the Modigliani–Miller theorem (1958), which proposed the irrelevance of debt-equity structure. He shared the Nobel Prize in Economics in 1990, along with Harry Markowitz and William F. Sharpe. He attended Harvard University as an undergraduate student, and received a Ph.D. in economics from Johns Hopkins University, 1952. In 1958, at Carnegie Institute of Technology (now Carnegie Mellon University), he collaborated with his colleague Franco Modigliani on the paper The Cost of Capital, Corporate Finance and the Theory of Investment. This paper urged a fundamental objection to the traditional view of corporate finance, according to which a corporation can reduce its cost of capital by finding the right debt-to-equity ratio. According to the Modigliani–Miller theorem, on the other hand, there is no right ratio, so corporate managers should seek to minimize tax liability and maximize corporate net wealth, letting the debt ratio chips fall where they will. The way in which they arrived at this conclusion made use of the “no arbitrage” argument, i.e. the premise that any state of affairs that will allow traders of any market instrument to create a riskless money machine will almost immediately disappear. They set the pattern for many arguments based on that premise in subsequent years. (Source: Wikipedia)
Know Thyself 