Three U.S. economists were awarded the Nobel Prize in economics Monday morning for their work on the study of changes in prices in stocks, bonds, and other assets.
The winners are Eugene Fama and Lars Peter Hansen of the University of Chicago, and Robert Shiller of Yale.
Fama and Schiller are often thought of as intellectual opponents. Fama is famous for developing the efficient market hypothesis, which is the idea that all available information is reflected in the price of an asset. Schiller, on the other hand, has argued at length that stock prices can move out of sync with underlying fundamentals, and that markets can be irrational. He is perhaps best known for his role in creating the Case-Shiller home price indices, which are widely watched by investors.
Hansen is famous within economics for "high-tech econometric techniques that are used well beyond finance," in the words of economist Donald Marron. But it is Fama and Shiller who likely will be the focus of media reports in the days and weeks ahead, because their work has been particularly relevant in politics since the collapse of the housing market in 2008.
Shiller warned that stock markets were overvalued shortly before the dot-com burst in his 2000 book Irrational Exuberance, which he updated in 2005 to address the ongoing real estate boom. In 2009, he collaborated with another economics Nobel Prize winner, the Berkeley economist George Akerlof (the husband of Federal Reserve chair nominee Janet Yellen), to release Animal Spirits, a book on how psychology can lead investors to engage in mass mistakes, such as bubbles. The book's title is based on the phrase John Maynard Keynes to describe the unpredictable influence of human behavior on markets.
Fama, on the other hand, has argued that it is impossible for an individual's predictions to systematically beat markets or to identify a 'bubble' in markets in real time. He even has specifically criticized Shiller, saying that Shiller was only able to forecast the crash of the housing market because he constantly makes such predictions. In recent months, Shiller has begun to warn of bubbles in U.S. housing markets again.
Because of his work on efficient markets, Fama does not believe in actively-managed investing, saying that it is "impossible to identify true winners on a reliable basis." Instead, he prefers passive management — investing in a broad portfolio of index funds.
Fama is thought of as one of the leaders of the Chicago school of economics, a brand of academic economics associated with free-market economics. Since the 2008 crisis, Fama and other Chicago economists have sometimes drawn accusations, especially from liberal commentators, that they are implicated in the banking panic. In turn, Fama criticized the bailout and stimulus efforts of the Obama administration in early 2009.