Fama, Shiller, Hansen Win 2013 Nobel Prize in Economics

Eugene F. Fama, Robert J. Shiller and Lars Peter Hansen shared the 2013 Nobel Prize in Economic Sciences for their work toward creating a deeper understanding of how market prices move.
“The Laureates have laid the foundation for the current understanding of asset prices,” the Royal Swedish Academy of Sciences, which selects the winner, said today in a statement in Stockholm. “It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”

Fama, 74, known among economists as the “father of modern finance, is a professor at the University of Chicago. In the mid-1960s he propounded theories that argued that stock-price movements are unpredictable and follow a “random walk,” making it impossible for any investor, even a professional, to gain an advantage. He also showed in later work that so-called value and small-cap stocks have higher returns than growth stocks, and he rejected the notion that markets often produced bubbles.

Theory, Practice

“Few economists have had a greater influence on financial theory and practice,” Douglas Clement, an official at the Federal Reserve Bank of Minneapolis, wrote in December 2007.

Fama’s work “transformed” Wall Street by promoting the popularity of index funds as investors questioned the value of paying for active portfolio management, according to Clement.

The study of housing prices has been a long-standing interest to Yale University Professor Shiller. Dissatisfied with the existing data, he created the S&P/Case-Shiller home price indexes, along with Karl Case. Their index captured U.S. home prices doubling from 2000 to mid-2006 and then plunging 35 percent amid the worst financial crisis since the Great Depression.

When he learned he’d won this year’s prize, Shiller’s reaction was one of “disbelief,” he said via telephone at a press conference in Stockholm today. “I did not expect it.”

Shiller demonstrated in the 1980s that it’s easier to predict prices over the long term after finding that stock prices swing more than dividends paid by a company, a relationship that also holds for bonds. That discovery built on Fama’s work. Hansen, also at the University of Chicago, is known for developing a statistical method to test theories of asset pricing.

Efficient Markets

Shiller, born in Detroit in 1946, has been at the vanguard of economists chipping away at the theory of efficient markets, which argued that markets price in all available information and that investors can’t beat the market. His research showed that investors can be irrational and that assets from stocks to housing can develop into bubbles.

Shiller earned his Ph.D in economics from the Massachusetts Institute of Technology in 1972. In 1981 he released a broadside against the theory of efficient markets with a paper in the American Economic Review that showed stock prices were far too volatile to reflect the future stream of earnings from the asset. The paper was titled “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?”

In 2011, at the journal’s centennial, it declared his work one of the 20 most important papers ever published, alongside papers from other Nobel laureates like Milton Friedman, Joseph Stiglitz, Friedrich Hayek and Paul Krugman.
Milton Friedman

Hansen, 60, is one of the co-founders of the Becker Friedman Institute at the University of Chicago, which builds on the legacy of Milton Friedman.
His work explores formal implications of dynamic economic models in which decision makers face uncertain environments. The main theme of his research has been to devise and apply econometric methods that are consistent with the probabilistic framework of the economic models under investigation. His work has implications for consumption, savings investment, and asset pricing.
The Nobel economics prize has in the past helped laureates achieve recognition for their theories outside academic circles, often bringing them closer to policy making. Past winners include Amartya Sen, James Tobin, Paul Krugman and Robert Solow.

Previous Winners

Last year’s prize was awarded to U.S. economists Alvin E. Roth and Lloyd S. Shapley for their exploration of how to make markets work more efficiently by better matching supply with demand. In 2009, Elinor Ostrom became the first woman to win when she received the prize together with Oliver Williamson for investigating the limits of markets and how organizations work.

Annual prizes for achievements in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel, the Swedish inventor of dynamite who died in 1896, and the first prizes were handed out in 1901. The economics award was set up by Sweden’s central bank in 1968.

The official name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The money, 8 million kronor ($1.2 million), a gold medal and a diploma, will be presented to the laureates at a ceremony in Stockholm on Dec. 10, the anniversary of Nobel’s death.

Last week, Martin Karplus, Michael Levitt and Arieh Warshel were awarded the Nobel in chemistry. Francois Englert and Peter W. Higgs shared the physics honor, while James E. Rothman, Randy W. Schekman and Thomas C. Sudhof were awarded the 2013 Nobel Prize in Physiology or Medicine. The literature prize went to Alice Munro.

This year’s peace prize, awarded Oct. 11 in

Oslo, went to the Organisation for the Prohibition of Chemical Weapons.
Since 2012, laureates have had to make do with 20 percent less in prize money than previous winners, a move the Nobel Foundation said in June last year was necessary to preserve its capital.

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