WASHINGTON — Three American professors — Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller — were awarded the Nobel Memorial Prize in Economic Science
on Monday for showing that asset prices move unpredictably in the short
term but with greater predictability over longer periods.
The three men, who worked independently and whose findings are
contradictory in some respects, together painted a picture of stock and
bond markets moved by a mix of rational and irrational considerations.
The findings have influenced the way many people invest, discouraging
attempts to anticipate price movements and contributing to the
popularity of index funds that buy broad, diversified baskets of
equities and other assets.
Mr. Fama and Mr. Hansen are professors at the University of Chicago; Mr.
Shiller is a professor at Yale University. Their work “laid the
foundation for the current understanding of asset prices,” according to a
statement from the Royal Swedish Academy of Sciences, which awards the
annual prize.
Mr. Fama, 74, was honored for showing that asset prices are “extremely
hard to predict over short horizons.” His work, beginning in the 1960s,
showed that asset prices moved efficiently in the short term, quickly
incorporating new information and leaving little opportunity for
predictable profits.
Mr. Shiller, 67, later introduced an important caveat to the idea that
markets operate efficiently, finding that stock and bond prices show
greater predictability over longer periods. Mr. Shiller and other
economists see evidence that these movements cannot be entirely
explained by rational decision-making, and instead reflect the
irrational behavior of market participants.
The committee noted this view, but it also honored Mr. Hansen, 60, for
his work in developing a statistical method for testing rational
theories of asset price movements, pushing back against behavioral
accounts. In essence, he found evidence that risk measures could help to
explain these longer-term patterns.
The committee, in honoring the three men together, said their findings
“greatly improved our understanding of how financial markets work, when
they seem to work well and when they seem to work otherwise.”
Mr. Shiller, reached by phone during the news conference announcing the award, described his reaction to the news.
“Disbelief,” he said. “That’s the only way to put it.”
SOURCE : http://www.nytimes.com/2013/10/15/business/3-american-professors-awarded-nobel-in-economic-sciences.html
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