Bloomington Leader

IU College of Arts and Sciences Alumnus Philip Dybvig Wins 2022 Nobel Prize in Economics

On Monday, College of Arts and Sciences alumnus Philip Dybvig (B.A. ’76), along with two prominent collaborators Ben S. Bernanke and Douglas W. Diamond, was awarded the 2022 Nobel Prize in economics. Dybvig and his colleagues laid the foundation for modern banking research in the early ’80s, and their analyses have been essential in the regulation of financial markets and handling then unprecedented financial crises.

Dybvig’s journey to a Nobel began at Indiana University as a double major in mathematics and physics, both academic departments within the College of Arts and Sciences. He then went on earn his M.A. (1978) and Ph.D. (1979) from Yale University. He is the Bancshares Professor of Banking and Finance at Washington University at St. Louis in the Olin School of Business, and his 1983 paper on the Diamond-Dybvig model of bank runs is renowned in the field of economics.

Their research showed “how banks create liquidity in the economy, and how this liquidity subjects banks to sudden, panicked withdrawals by customers if there is no deposit insurance or other protection,” noted The New York Times shortly after the Prize was announced. Further, the Diamond-Dybvig model described how “deposits used to finance business loans may be unstable and give rise to bank runs” and how “Banks may need a government safety net, like deposit insurance, more than borrowers do” to avert further financial crisis.

Much of Dybvig’s scholarship focuses on the role of banks in the economy. In part, he studies the quandary that occurs when an economy functions using savings that are then channeled toward investments: Those who save will want to be assured instant access to their money for instances of large purchases, both expected and unexpected. Meanwhile, businesses and homeowners want to be assured that they won’t be forced to repay their loans earlier expected.

Dybvig and Diamond’s theory says that the perfect solution to this quandary is engendered in modern banks and the banking system. Banks act as intermediaries that accept many deposits from many savers, thus allowing depositors to have access to their money at any time while still offering long-term loans to borrowers.

“I am happy to join the chorus of admiration for IU alumnus Philip H. Dybvig, who started his higher-education journey at IU Bloomington in our College of Arts and Sciences,” said Provost and Executive Vice President Rahul Shrivastav. “His research on the risks and rewards of modern banking offer clear guidance on how governments can help prevent economic crises from shattering economies. We can all look to Professor Dybvig as a model of how a liberal arts education, when met with passion and drive, can make the world a better place.”

“On behalf of the College, I extend our heartfelt congratulations to Professor Dybvig on this outstanding achievement,” said Rick Van Kooten, Executive Dean of the College of Arts and Sciences. “Throughout his career Professor Dybvig has taken a multidisciplinary approach to his teaching and research, and importantly, he has put his scholarship in service to solving some of our society’s most pressing problems, including his groundbreaking and now-foundational work on modern banking theory. As a scholar and an alumnus, he embodies what is best about the College and IU.”

“This award reminds us of the power of mathematics,” says Professor Kevin Pilgrim, chair of the Department of Mathematics. “The Diamond-Dybvig model of bank runs and financial crises is expressed using the same language of calculus taught in our basic courses.  We tell our students that you can do almost anything with a math degree. Look at titles of our math alums--Associate Pastor to Explosives Technician to Problem Solver to Web Programmer. We have to add Nobel Prizewinner to the list now!”

“As physicists, we seek to build models that contain enough aspects of a phenomenon to describe it reasonably accurately, but are yet simple enough to provide useful insights into that phenomenon in order to help explain or control it,” says Professor David Baxter, chair of the Department of Physics. “This is what we train our students to do, and that is just what the Diamond-Dybvig model has done with banking systems for almost four decades. It is extraordinarily gratifying to see one of our graduates applying these lessons so beautifully and successfully to such an important problem.”

According to Professor and Chair of the Department of Economics, Michael Kaganovich: "Economists of the first caliber, like the prize winners, develop transparent understanding of very complex phenomena of economic behavior and complex data patterns by means of mathematical and statistical analysis. Therefore, a strong background in mathematics is a key ingredient in graduate education in economics. In fact, Dybvig’s undergraduate degree in mathematics is a typical steppingstone to the heights of the economics profession. This continues to be the case: these days, students we place in the top Ph.D. programs in economics are typically joint math-econ majors."

For more information about the Prize, please visit: https://www.nobelprize.org/prizes/economic-sciences/2022/press-release/

Dybvig is only the most recent IU and College alum to win a Nobel Prize. Elinor Ostrom (1933-2012) was a Distinguished Professor and Arthur F. Bentley Professor of Political Science in the College of Arts and Sciences and received the 2009 Nobel Prize in Economic Sciences. She was the senior research director of the Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis.

Original source can be found here.