2013 Nobel Economics Prize Values Assets
And the Nobel Prize in economics goes to … Eugene F. Fama, Robert J. Shiller, and Lars Peter Hansen. None of these three is a surprise candidate; it’s mostly been a matter of “when,” not “if,” with the caveat that since they don’t award posthumous Nobels, there was always the possibility that the Grim Reaper might get there before the committee did. But thankfully not the case!
Robert Shiller will be known to most of you for his work on the housing market. The S&P/Case-Shiller index of home prices is now the standard measure of activity in the housing market, and Shiller was the go-to economist for quotes on the housing bubble -- before and after it popped. However, this is not the work for which he is being awarded the prize; the committee’s press release cites his earlier pathbreaking work on stock markets.
Eugene Fama is essentially being honored for the observation that you can’t accurately forecast the price of stocks. The Efficient Markets Hypothesis has taken a beating in recent years, often from people who didn’t understand what it meant -- not that stock prices somehow reflected the true, underlying value of the company, but that their movements were impossible to forecast because any piece of information that you already have is probably already incorporated into the price of the stock.
Lars Peter Hansen’s work … well, here’s Tyler Cowen on Lars Peter Hansen: “For years now journalists have asked me if Hansen might win, and if so, how they might explain his work to the general reading public. Good luck with that one.” Here’s my favorite attempt (one sentence) for generalists. Here’s a more technical version from Alex Tabarrok. Here’s the Nobel Committee on all three.
I don’t have that much to add, except that it seems fitting that this year, as we try to stumble out of the financial crisis toward a more robust global system, the Nobel Committee has chosen to focus on asset prices.