Americans Win Economics Nobel for Market Insights
Three American scholars won the Nobel Prize in economics for
pioneering work in financial markets that has transformed portfolio
management and asset pricing and launched the study of how emotions
affect investment decisions.
The Royal Swedish Academy of Sciences on Monday honored Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University, citing their complementary but independent breakthroughs on "empirical analysis of asset prices."
The laureates focused on how prices are set for stocks and bonds, but their findings have implications far beyond financial markets. Every corner of the macroeconomy is affected by the risk tolerance—as well as rational and irrational acts—that spur individuals and corporations to invest or save.
"Nobody's scratching their heads over this one. They've all been on the short list for many years," said Mark Gertler, a New York University economist currently on sabbatical at Columbia University. "The interesting thing is how the three are connected."
The 74-year-old Mr. Fama is seen by many as the father of modern finance, for his 1960s-era work on the theory of efficient markets. After meeting with little success in stock picking, Mr. Fama found that markets were efficient in a day-to-day or month-to-month time frame. They absorbed the latest information swiftly and seamlessly and yielded accurate asset prices. The conclusion upended notions of trying to profit from timing the market or stock picking—and gave rise to the index-funds industry.
Twenty years later, Mr. Shiller found that markets' short-term efficiency was less enduring over longer periods. He examined why asset prices were too volatile to be justified by fundamental information, such as dividends. In spans of three to five years, prices moved for a host of reasons, such as investors' risk aversion—or their optimism or pessimism. The field of behavioral economics was born as scholars attempted to tease out what was behind investors' shifting risk tolerances and decisions.
At the same time, Mr. Hansen was working on questions about market predictability, and came up with a tool for studying changes in asset pricing. That led to his Generalized Method of Moments—an econometric tool that today is a standard economics theorem, applicable throughout the field and not just to financial markets.
Mr. Hansen's theorem is "absolutely spectacular," said John Cochrane, a professor at the University of Chicago Booth School of Business. "It looks really complicated but he's kind of taken it to another dimension…and seen how gloriously simple it is."
At 60, Mr. Hansen is the youngest of Monday's winners. "I've been feeling old recently," he said. "But this gives me the feeling of being young." He said his work on the theorem dates back to when he was a graduate student and starting out as a professor—and being mentored by 2011 Nobelists Thomas Sargent and Christopher Sims.
Mr. Cochrane, who is Mr. Fama's son-in-law as well as his colleague, said Monday that after hearing from the Nobel prize panel, his father-in-law resumed his regular routine, teaching a class Monday at Chicago, his professional home of 54 years. Although Mr. Fama has exchanged tennis and windsurfing for golf, he doesn't show any signs of slowing his pace, Mr. Cochrane said.
Mr. Shiller, 67, is one of the creators of the Standard &
Poor's/Case-Shiller Home Price Index, which tracks changes in
residential values across the U.S. He is working on a book with
George Akerlof,
who shared the 2001 Nobel, to be titled "Phishing for Phools,"
about manipulation and deception in economics, Mr. Shiller said. Messrs.
Shiller and Akerlof co-wrote "Animal Spirits: How Human Psychology
Drives the Economy, and Why It Matters for Global Capitalism."
Mr. Shiller, who has kept a diary since the age of 12, said in January he plans to teach a free online introductory course on financial markets through Coursera. There will be some emphasis on behavioral finance in the class, he said.
Mr. Shiller said that after being notified early Monday by the prize committee, he called his brother in his hometown of Detroit, where the Nobel announcement evidently hadn't spread. "Did you hear the news?" he asked. His brother replied, "The Tigers lost," referring to the Boston Red Sox come-from-behind win Sunday night.
The Royal Swedish Academy of Sciences on Monday honored Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University, citing their complementary but independent breakthroughs on "empirical analysis of asset prices."
The laureates focused on how prices are set for stocks and bonds, but their findings have implications far beyond financial markets. Every corner of the macroeconomy is affected by the risk tolerance—as well as rational and irrational acts—that spur individuals and corporations to invest or save.
"Nobody's scratching their heads over this one. They've all been on the short list for many years," said Mark Gertler, a New York University economist currently on sabbatical at Columbia University. "The interesting thing is how the three are connected."
The 74-year-old Mr. Fama is seen by many as the father of modern finance, for his 1960s-era work on the theory of efficient markets. After meeting with little success in stock picking, Mr. Fama found that markets were efficient in a day-to-day or month-to-month time frame. They absorbed the latest information swiftly and seamlessly and yielded accurate asset prices. The conclusion upended notions of trying to profit from timing the market or stock picking—and gave rise to the index-funds industry.
Twenty years later, Mr. Shiller found that markets' short-term efficiency was less enduring over longer periods. He examined why asset prices were too volatile to be justified by fundamental information, such as dividends. In spans of three to five years, prices moved for a host of reasons, such as investors' risk aversion—or their optimism or pessimism. The field of behavioral economics was born as scholars attempted to tease out what was behind investors' shifting risk tolerances and decisions.
At the same time, Mr. Hansen was working on questions about market predictability, and came up with a tool for studying changes in asset pricing. That led to his Generalized Method of Moments—an econometric tool that today is a standard economics theorem, applicable throughout the field and not just to financial markets.
Mr. Hansen's theorem is "absolutely spectacular," said John Cochrane, a professor at the University of Chicago Booth School of Business. "It looks really complicated but he's kind of taken it to another dimension…and seen how gloriously simple it is."
At 60, Mr. Hansen is the youngest of Monday's winners. "I've been feeling old recently," he said. "But this gives me the feeling of being young." He said his work on the theorem dates back to when he was a graduate student and starting out as a professor—and being mentored by 2011 Nobelists Thomas Sargent and Christopher Sims.
Mr. Cochrane, who is Mr. Fama's son-in-law as well as his colleague, said Monday that after hearing from the Nobel prize panel, his father-in-law resumed his regular routine, teaching a class Monday at Chicago, his professional home of 54 years. Although Mr. Fama has exchanged tennis and windsurfing for golf, he doesn't show any signs of slowing his pace, Mr. Cochrane said.
Mr. Shiller, who has kept a diary since the age of 12, said in January he plans to teach a free online introductory course on financial markets through Coursera. There will be some emphasis on behavioral finance in the class, he said.
Mr. Shiller said that after being notified early Monday by the prize committee, he called his brother in his hometown of Detroit, where the Nobel announcement evidently hadn't spread. "Did you hear the news?" he asked. His brother replied, "The Tigers lost," referring to the Boston Red Sox come-from-behind win Sunday night.
No comments