Fama, Shiller, Hansen win 2013 Nobel Prize in economics

Long-Run Prices

Shiller, a Yale University professor, demonstrated in the 1980s that it’s easier to predict prices over the long term, after finding that stock prices fluctuate more than changes in a company’s dividends would suggest. He showed that the same relationship holds for bonds.

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

“Shiller’s research showed episodes when assets were overvalued,” said Englund. “Shiller said in the late 1990s, when IT shares rose, that this is not sustainable in the long- term, which he was right about. He also warned for many years about a housing bubble in the U.S. He was right there too.”

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.”

Imperfect System

Shiller said the 2008 financial crisis “reflected mistakes and imperfections in our financial system that we are already working on correcting. I think there’s much more to be done. I think it will take decades. But we’ve been through financial crises many times in history and we generally learn from them.”

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 found that stock prices were bad ‘weathermen,’” said Nobel laureate George Akerlof, an economics professor at the University of California at Berkeley and husband of Janet Yellen, President Barack Obama’s nominee to be Federal Reserve chairman. “Historically, they have been much more variable than the current value of the dividend streams.

Rational Expectations

“From this evidence, he concluded that rational models of the stock market, in which stock prices reflect rational expectations of future payouts, are in error. This clever combination of logic, statistics, and data implies that stock markets, are, instead, prone to irrational exuberance.”

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.

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