Three American professors have won the 2013 Nobel Prize for Economics for their work in identifying long-term trends in the prices of stocks and bonds, based in part on analyzing the role of risk.
Professors Robert J. Shiller of Yale University and Eugene F. Fama and Lars Peter Hansen, both of the University of Chicago, won “for their empirical analysis of asset prices,” the Royal Swedish Academy said in announcing the honor Monday.
“The Laureates have laid the foundation for the current understanding of asset prices,” the academy said. “It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”
The economists’ research spans decades, stretching back to the 1960s. They pursued their theories independent of one another, laying the groundwork for the rise of index funds and “behavioral finance,” which takes investors’ motivations and limitations into account.
Here’s how the academy summarized their contributions:
“Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.”
“Lars Peter Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing. Using this method, Hansen and other researchers have found that modifications of these theories go a long way toward explaining asset prices.”
“Robert Shiller …found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.”
Fama, 74, began his work in the mid-1960s; as Bloomberg notes, he is often called the “father of modern finance.”
In an interview with the academy conducted minutes after the phone call informing him of his win, Fama explained that he might not have embarked on his legendary career, if he hadn’t lost his passion for studying French.
“In my junior year in college, I was getting kind of tired of French. So, I took an economics course, and I loved it,” he said. “The rest of my two years in college I spent in economics.”
In winning the Nobel, they will split a cash award of 8 million Swedish kroner, a bit more than $1.2 million.