Rival Economists Share Nobel—Bubbles, Anyone?

The winners of the 2013 Nobel Prize in Economic Sciences are announced at the Royal Swedish Academy of Sciences in Stockholm on Oct. 14 Photograph by TT/Claudio Bresciani/AP Photo

Robert Shiller, author of Irrational Exuberance, is one of the world’s leading expositors of the theory that financial markets are prone to bubbles. Eugene Fama says he doesn’t even know what bubbles are.

The people who give out Nobel prizes apparently couldn’t decide which side to take this year so they gave the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to both of them. Lars Hansen, who is an expert in statistical techniques for analyzing asset prices, shared the prize with them.

Splitting the prize between Shiller and Fama is “like giving a prize to the Yankees and the Red Sox,” Robert Solow, a Nobel prize-winning economist at Massachusetts Institute of Technology, told Bloomberg.

In its polite, circumspect language, the Nobel committee played down the differences between Shiller and Fama, saying those two plus Hansen “have laid the foundation for the current understanding of asset prices.”

That’s true, but it misses the big point: Fama came first, establishing important principles about market efficiency. Shiller came next, harnessing Hansen’s techniques to demonstrate that while markets are efficient in theory, they are far from efficient in reality.

Shiller, a Yale University economist who was already respected in academic circles, vaulted onto the public stage with the publication of Irrational Exuberance. It came out fortuitously in 2000, just as the Internet bubble in the stock market was bursting. Later, Shiller warned about bubbles in the housing market and was right again.

Fama, meanwhile, who is a finance professor at the University of Chicago, has never bought into the idea that stocks and bonds can be affected systematically and for long periods by such base factors as human emotions.

In a 2010 interview with the New Yorker’s John Cassidy, Fama said, “I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”

Hansen, the third recipient, is a colleague of Fama’s in Chicago. All three recipients are Americans.

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