Three Americans Win Nobel Economics Prize

Oct 14, 2013
Originally published on October 14, 2013 5:19 pm




The Nobel Memorial Prize in Economics went to three American professors today. In announcing the honor, the Royal Swedish Academy of Sciences said the men all contribute to our understanding of how markets price things like stocks and homes. But as NPR's Dan Bobkoff reports, that doesn't mean the three economists always agree.

DAN BOBKOFF, BYLINE: The winners are Eugene Fama and Lars Peter Hansen at the University of Chicago and at Yale, Robert Shiller. At first blush, the three top economists are an odd grouping for a single prize. Justin Wolfers of the University of Michigan says some of the winners' findings are contradictory.

JUSTIN WOLFERS: You could say Fama wins it for showing that markets are efficient. Shiller wins it for showing that markets aren't efficient. And Hansen wins it for providing statistical tools so we can prove both of these competing contingents.

BOBKOFF: Fama found in the '60s that stock prices very quickly rise and fall based on new information. If news breaks about earnings or a stock split, the market reacts fast. What Fama found is that new information gets old quickly, making it nearly impossible to predict which way a stock will go in the future, making owning individual stocks riskier. In an interview on the Nobel Prize website, Fama said the relevance of his work is all about how you price risk.

EUGENE FAMA: The idea is really, how do you measure risk and if the market is pricing things correctly, what is the relation between the expected return, which is the compensation for risk, and risk.

BOBKOFF: But in the '80s, Shiller found that the markets sometimes does not price things correctly because traders can be irrational and emotional. Shiller was among the pioneers of behavioral finance, incorporating psychology into the field. And his work shows that when prices get truly out of whack with reality, that's a sure sign of a bubble, the kind that popped with tech stocks in the '90s and housing around 2007, leading to the worst crisis since the Great Depression.

At a press conference at Yale today, Shiller credited his wife, a psychologist, for shaping how he sees economics.

ROBERT SHILLER: See, I think that there's many different intellectual approaches to the basic questions that people want now answered. People develop certain ways of thinking about this.

BOBKOFF: Shiller's fame is for predicting bubbles like the dot-com bust and the housing collapse. Wolfers of the University of Michigan says this is actually a big point of difference between Shiller and Fama.

WOLFERS: Fama not only doesn't believe in bubbles, I think isn't even sure he knows what one is.

BOBKOFF: But Shiller says even though we have frequent irrational cycles of boom and bust, those cycles themselves are predictable patterns over the long term.

Then there's the third Nobel winner, Lars Peter Hansen, who was in a bit of disbelief when he got the news this morning.

LARS PETER HANSEN: My immediate reaction? Well, first I want to make sure this is all real but...

BOBKOFF: Hansen developed something called the generalized method of moments. It's a way to reduce the number of unverifiable assumptions that go into economic theories. Economists use Hansen's methods to assess the models of guys like Fama and Shiller.

The three American economists all worked separately. And early this morning, each learned of the news in his own way. Fama says he was up early preparing his class for the day. Hansen was walking his dog when he got the call. Shiller told the crowd at Yale that the call came as he was leaving the shower. He then called his brother, who, for a guy in Detroit this morning, had perhaps a predictably rational response.

SHILLER: And I said, did you hear the news? And he says, the Tigers lost.


BOBKOFF: Shiller and the other two economists will each get a third of the $1.2 million prize. Dan Bobkoff, NPR News. Transcript provided by NPR, Copyright NPR.