Eugene F. Fama, Robert J. Shiller and Lars Peter Hansen shared the 2013 Nobel Prize in Economic Sciences for their research on how the market prices of assets such as stocks move.
The three laureates, all Americans, “laid the foundation for the current understanding of asset prices,” the Royal Swedish Academy of Sciences, which selects the winner, said today in Stockholm. “It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”
Their work spans almost 50 years of research, beginning with Fama’s finding that it’s difficult to predict price movements in the short run, a conclusion that contributed to the development of stock-index funds. Later work by Shiller and Hansen focused on longer-run price swings and the extent to which they could be explained by such fundamental features as dividend payouts on stocks and the risk appetite of investors.
The awards are a “very interesting collection because Fama is the founder of the efficient market theory and Shiller at least is one of the critics of it,” said Robert Solow, winner of the Nobel economics prize in 1987 and professor emeritus at the Massachusetts Institute of Technology in Cambridge.
“It’s like giving a prize to the Yankees and the Red Sox,” he said, comparing the competing economic theories to the rivalry between the New York and Boston baseball teams. “It was just an indication that what they were interested in was all those that had contributed to the modern theory of finance at both ends of the spectrum.”
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.
“Fama’s research at the end of the 1960s and the beginning of the 1970s showed how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day’s or a week’s time,” said Peter Englund, professor in banking at the Stockholm School of Economics and secretary of the committee that awards the Nobel Prize in Economic Sciences. “That shows that there is no point for the common person to get involved in share analysis. It’s much better to invest in a broadly composed portfolio of shares.”