Windsurfing Magazine





We have lifted this story wholesale from the Maui News pages on
– we hope that Harry Eagar, their staff writer who broke the story, will forgive
us – but considering the circumstances it seemed a great story for a wider audience.


WAILEA — If he hadn’t won the Nobel Prize for economics Wednesday,
Professor A. Michael “Mike” Spence would have been windsurfing at
Kanaha Beach Park.

Tonight, he and his wife, Monica Cappucini, had planned a dinner date with
lawyer Isaac Hall — Spence’s teammate on the Princeton ice hockey
team in the 1960s — and Hall’s wife, Dana Naone Hall.

But when the telephone rang at 3:32 a.m. Wednesday at Spence and Cappucini’s
Wailea condominium, their social calendar was erased.

“I was stunned, kind of numb,” said Spence six hours later, after
he had had a chance to reflect.

“It’s really quite wonderful.” He paused. “It changes your

Spence really hadn’t been expecting it. But Stanford University, where
he was dean of the Graduate School of Business until retiring in 1999, was.
A Stanford colleague was monitoring the Nobel Prize Web site, and as soon as
the economics winners were posted, he called Spence on Maui. Spence was so unprepared
that he had to send a fax back to Stanford to update his online biography there,
which as of Wednesday morning still listed him as a director of several corporate
boards (like Bank of America and Sun Microsystems), from which he had resigned
months and years ago.

It was a little ironic, since Spence’s work has concentrated on what are
called “imperfect markets,” those in which buyers have much less information
than sellers. His work in this field dates back to the 1970s, but the Internet
has changed the conditions, making it much cheaper and easier for buyers to
acquire information — if it can be trusted.

“Obsolete content is a huge problem on the Internet,” he says.

His prize-winning work involves trying to understand how imperfect (or asymmetrical)
markets work in theory, and also in practice “when people don’t know
— what do people do about it?”

In the Nobel Prize market, Spence’s information was so imperfect that
he said he had no idea what the monetary value of the prize was, or what he
would do with it.

It was 10 million Swedish kroner, split three ways, or a little over $300,000
for him.

Cappucini was smiling while fielding telephone calls and hosting the reporters
and camera operators who showed up on their doorstep Wednesday.

“I was so pleased. I think everybody who knows him knew that sooner or
later he would win the Nobel Prize,” she said.

“We’re very privileged,” said Cappucini. “But we feel a
little bit of a conflict. You turn on the TV and the reality of what is happening
(in Afghanistan) is stunning.

“When economies get better, we can hope for more peace.”

Spence replied, “It would be nice if that were true.”

Unlike many recent economics laureates whose work is in econometrics and is
so abstruse that even other economists have a hard time following it, Spence’s
work can be expressed in homely terms. He likes to take buying a used car as
an example.

The seller, he says, knows everything about the car, but the buyer knows almost

If the seller has a better than average car, he knows he will have a hard time
getting more than the average price for that model, so he won’t even offer
to sell.

Therefore, the used cars that are offered will tend to be in less than average
condition, with the sellers hoping to get a bit more than they are worth.

This phenomenon feeds on itself, in a downward spiral, until the used car market
“gets screwed up.”

But similar effects operate in all kinds of markets, including labor.

One way people attempt to close the gap between perfect and imperfect knowledge
is by “signaling.”

For example, a manufacturer who knows he has a superior product can afford
to offer a very good guarantee, because he knows there won’t be many instances
when he has to fulfill it.

A maker of lesser quality goods will not be able to afford such a broad guarantee.

In job markets, the signaling primarily takes the form of education. The employer
takes the time and expense the applicant spent on training as an indication
of his or her labor value.

Spence’s work was not originally phrased in such everyday terms.

His first paper was highly mathematical. His mentor handed it back to him and
told him, “I want you to go away and rewrite it in the simplest form you
can. Then I’ll read it.”

He did.

“It probably dramatically increased its accessibility,” says Spence

According to the Royal Swedish Academy of Sciences, the work of Spence and
his co-winners, George Akerlof of Berkeley and Joseph Stiglitz of Columbia,
has contributed to a better understanding of markets as varied as agriculture
and investments.

Spence himself says he thinks the papers from almost 30 years ago have led
students of economics to new insights both theoretical and empirical. “I
hope so.”

He, Akerlof and Stiglitz did not work together or produce joint papers. But
their interests coincided, and “I learned a lot from reading their papers.”
(The used car model was originally Akerlof’s.)

According to the academy, Spence “identified an important form of adjustment
by individual market participants, where the better informed take costly actions
in an attempt to improve on their market outcome by credibly transmitting information
to the poorly informed.

“Spence showed when such signaling will actually work. While his own research
emphasized education as a productivity signal in job markets, subsequent research
has suggested many other applications, e.g., how firms may use dividends to
signal their profitability to agents in the stock market.”

Spence says the theory of imperfect markets is universal. In fact, it is a
kind of shadow market behind every market in which goods or services are exchanged.

This shadow market — which is composed of information — usually doesn’t
come into people’s consciousness, he says, though it has more in the past
five years, because people have been thinking about how information transfer
via the Internet affects business.

Spence, 58, was born in Montclair, N.J., because his Canadian father was stationed
in Washington, D.C., during the war. After the war, they returned to Canada,
and Spence grew up in Winnipeg.

He returned to New Jersey to take a degree in philosophy. He then won a Canadian
Rhodes Scholarship to Oxford, where he took a degree in mathematics.

After that he did his doctorate in economics at Harvard.

A U.S. citizen, he has spent his entire academic career here, except for his
terms at Oxford.

In 1990 he became dean at the Stanford Graduate School of Business, retiring
and becoming emeritus professor in 1999.

He isn’t really retired, he says, but left full-time teaching to pursue
a new career in entrepreneurial ventures.

His wife, who met him because “I was his travel agent,” says they
are able to spend a week or 10 days on Maui every six to eight weeks, and Spence
is able to do a lot of work here by telephone, fax and e-mails.

They were married four years ago. She retired from the travel business two
years ago when he retired as dean.

She was the one who answered the ringing phone in the middle of the night,
not too pleased at first.

After that, it was the typical Nobel Prize winner’s whirlwind, as Spence
and Cappucini tried to figure out what was expected of them.

First they called the family. Spence jokes that his children were incredulous.

There are three: Graham, just graduated from Princeton with a degree in history
and looking for work in New York City; Katherine, a sophomore at Columbia University,
also in New York City; and Marya, a sophomore at Menlo High School in Palo Alto,

By the time Marya got to school, says her stepmother, she was the only person
who hadn’t heard the news.

It became increasingly difficult to reach Spence, who was receiving nonstop
calls from colleagues, students and friends.

He called Hall to apologize for having to cancel Wednesday’s dinner engagement,
since he planned to leave for Stanford today.

He recalled that he and Hall played together four years on the Princeton hockey
team, where Hall “was a great defenseman.” Spence played left wing.

“He was a very, very good hockey player,” says Hall, who had been
delighted and surprised to find his old buddy was spending time on Maui.

“I got the sense he really likes Maui.” (Cappucini confirms it.)

They had lunch together recently and had planned to meet again with their wives

Spence called Hall on Wednesday morning with a “good news, bad news”
message, Hall says. “He said, ‘I have to break our dinner date, but
I won the Nobel Prize.’

“I’m as delighted as he is,” says Hall.

It took six hours for the Nobel committee to find Spence. A friend, a professor
of economics in Stockholm who is also on the Nobel selection committee, called
him about 9:30 a.m.

By that time, television camera operators were collecting in the living room
— though many fewer on Maui than if the news had come when Spence was home
in Palo Alto.

Still trying to sort out the consequences, Spence said he understood from colleagues
who had won economics Nobels in the past that “people want to hear what
you think,” so maybe there will be “an opportunity to talk about some
things you think are important.”

Two things Spence thinks are important are that Americans don’t save enough
and that in the long term something has to be done about the persistent international
trade deficit.


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