WASHINGTON – Three U.S. professors – Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller – were awarded the Nobel Memorial Prize in Economic Science on Monday for competing theories about the movements of asset prices.
The three men, who worked independently, were described as having collectively illuminated the financial markets by showing that stock and bond prices moved unpredictably in the short term but with greater predictability over longer periods. The prize committee said these findings showed that markets were moved by a mix of rational calculus and human behavior.
The decision to honor Fama and Shiller as contributors to a shared understanding of financial markets, however, papered over differences in their work that have been enormously consequential in recent years. Fama was honored for his work in the 1960s showing that market prices are accurate reflections of available information. Shiller was honored for circumscribing that theory in the 1980s by showing that prices deviate from rationality.
The difference in a nutshell?
Shiller issued prescient warnings about the housing bubble, while Fama continued to insist, even after the financial crisis, that prices had been rational.
Fama and Hansen are professors at the University of Chicago; Shiller is a professor at Yale University. Their work “laid the foundation for the current understanding of asset prices,” according to the Royal Swedish Academy of Sciences.
Hansen, 60, was honored for technical contributions that have made it easier to evaluate reasons for the movement of asset prices.
Fama, 74, was honored for showing that asset prices are “extremely hard to predict over short horizons.” His work showed that asset prices moved efficiently in the short term, leaving little opportunity for predictable profits.
Shiller, 67, introduced in the early 1980s an important caveat to the idea that stock and bond prices show greater predictability over longer periods. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making and instead reflect the irrational behavior of investors.