3 American Economists Win the Nobel Memorial Prize
October 17, 2013 Leave a comment
On Monday this week, 3 American economists were awarded the Nobel Memorial Prize in Economic Science at the Royal Swedish Academy of Sciences. They were awarded for their theoretical work which, “demonstrated the importance — and the limitations — of the idea that markets for assets such as stocks and housing are too efficient for most investors and policymakers to outsmart.”
The winners were Lars Peter Hansen, Eugene Fama (University of Chicago) and Robert Shiller (Yale).
Fama, 74, published his research “efficient markets hypothesis” in 1970. This argued that asset markets rapidly incorporate most information about an asset into its price. This then makes it almost impossible for investors to consistently beat the market.
“Shiller showed there’s a strong herd effect in financial markets,” said Nariman Behravesh, chief economist at consulting firm IHS. “The free-market people have a point that the markets are efficient in the long term. That hasn’t been thrown out the window. What has been thrown out the window is the idea that the market is always efficient in the short term.”
Shiller, 67, said that he started his research with the thought that Fama’s findings were partially true. “The efficient markets (theory) assumes that everyone is smart all the time — and that’s just wrong,” he said. “I like to be scientific too, but it’s also about noticing conflicting evidence and saying the theory is not quite right. Fama and other proponents of efficient-markets theory have a different view of human nature than I do.”
“The intellectual tension between Fama and Shiller neatly illustrates fissures that drive this week’s budget battles in Washington, and which financial markets wrestle with every day.” said Mark Zandi, Moody’s Analytics chief economist. Moody’s is one of the top credit rating agencies, whose CEO is Raymond McDaniel and CFO is Linda S. Huber.
“There’s a tension now in policy between the need to make markets work — look at all the innovation in energy today — but markets also need to be monitored, regulated and managed,” Zandi said. “Markets work until they don’t, and psychology and sentiment are very important, and people can make big mistakes.”
The Nobel committed said that the three winners did a great job incorporating “real-world importance” in their work. Fama showed that it is very difficult to beat the stock market, which is partially due to the rise of mutual funds which are designed to, “mimic the holdings of large market indices such as the Standard & Poor’s 500,” Zandi said.