The winners of the Nobel Prize in Economics were announced this Monday. The Royal Swedish Academy of Sciences awarded the three individuals “for their empirical analysis of asset prices.” The Prize Committee stated that this year’s laureates were able to foresee the long-term course of asset prices.
The winners are Robert Shiller of Yale University, and Eugene Fama and Lars Peter Hansen of the University of Chicago. These three men have worked independent of one another and promoted views that often conflicted with each other.
Robert Shiller is the Sterling Professor of Economics at Yale after previously teaching at the University of Minnesota and University of Pennsylvania’s Wharton School of Business. He received his Ph.D. from the Massachusetts Institute of Technology. His New York Times Bestseller “Irrational Exuberance” refuted the idea that market assets are always priced efficiently. The term “irrational exuberance” was coined by Alan Greenspan in 1996 and refers to the overvaluation of the market due to the sometimes illogical and emotional thinking of investors. The two editions of the book discussed the dot-com bubble and housing crisis respectively, accurately warning of economic downturns.
He challenged the efficient-market hypothesis which was formed by Fama, which maintains that it is impossible to outsmart the market as prices reflect all relevant information. With Karl Case and Allan Weiss, Shiller helped form the Case-Shiller index, which measures the average housing prices over long periods of time and has helped forward the validity of irrational exuberance.
Shiller’s son Benjamin Shiller ’04 is an assistant professor of Economics at Brandeis after graduating magna cum laude with a degree in economics and going on to earn a Ph.D. in Applied Economics from Penn’s Wharton School of Business. He teaches Microeconomic Theory, Industrial Organization, and Empirical Industrial Organization. Professor Shiller commented on his father’s success and career.
“It always felt kind of strange hearing his name as a potential Nobel Prize winner, and stranger when it happened. He just seemed like a regular dad to me. Having later gone into academic economics myself, many people assume we talked a lot about economics when I was growing up, but we didn’t. He did regular dad stuff like be assistant coach of my soccer team, even though he didn’t really know much of anything about soccer. I guess I would say one difference would be his love of his work. He did work a lot, but never seemed stressed about it,” Shiller said.
He went on to say “It wasn’t until I was starting college when he started to become known to people outside the profession, when his book ‘Irrational Exuberance’ was released, and he appeared on TV a lot. That was a little weird and made me think twice about whether I wanted to major in economics.”
Eugene Fama is the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago. He has spent his entire career at the university after receiving his Ph.D. in Economics and Finance there. Fama became known as the father of the efficient-market hypothesis after his doctoral thesis purported that stock prices are unpredictable and follow a random succession of steps. Contrary to Shiller, he believes that the recent financial downturn was caused by the strictness of government policies that prevented the market from taking its natural course. His theory is that Fannie Mae and Freddie Mac were encouraged to lower their lending standards as a result of government regulations. His co-authored 1969 article “The Adjustment of Stock Prices to New Information” was the first of many that set out to analyze how stock prices respond to events.
Lars Peter Hansen is the David Rockefeller Distinguished Professor of Economics at the University of Chicago. He received his Ph.D. in economics from the University of Minnesota. Prior to working for Chicago, he was an assistant professor at Carnegie Mellon University. He developed an econometric technique for analyzing data and asset prices that allow economists to more easily and efficiently test the various theories of what drives markets. Hansen is the co-founder of the Becker Friedman Institute in Chicago. He is well known for his work on the Generalized Method of Moments, which helps estimate parameters in statistical models. He co-directs a financial modeling group that works to develop improved models of linkages between the financial and real sectors of the economy after the 2008 economic downturn.
The three will share a prize of $1.2 million and be presented in Stockholm on Dec. 10, the anniversary of Alfred Nobel’s death.