Three American professors Eugene F Fama,Lars Peter Hansen and Robert J Shiller were awarded the Nobel Memorial Prize in Economic Science on Monday for competing theories about the movements of asset prices.
The three men,who worked independently,were described as having collectively illuminated the financial markets by showing that stock and bond prices moved unpredictably in the short term but with greater predictability over longer periods. The prize committee said these findings showed that markets were moved by a mix of rational calculus and human behaviour.
The decision to honour Fama and Shiller as contributors to a shared understanding of financial markets,however,papered over differences in their work enormously consequential in recent years. Fama was honoured for his work in the 1960s showing that market prices are accurate reflections of available information. Shiller was honoured for circumscribing that theory in the 1980s by showing that prices deviate from rationality.
The difference in a nutshell? Shiller issued prescient warnings about housing bubble,while Fama continued to insist,even after the financial crisis,prices had been rational. I dont even know what a bubble means, he said in 2010.
Hansen was honoured for technical contributions that have made it easier to evaluate reasons for the movement of asset prices. His work has helped expand the extent to which rational considerations can explain price movements.
Fama and Hansen are professors at the University of Chicago; Shiller is a professor at Yale University. Their work laid the foundation for the current understanding of asset prices,according to a statement from the Royal Swedish Academy of Sciences,which awards the annual prize.
Shiller,reached by phone during the news conference announcing the award,described his reaction. Disbelief, he said. Thats the only way to put it.
Fama,asked whether he had anticipated this moment,said,I didnt want to presume that I would win. He added,I knew that I would be thrilled,of course.