Americans Eugene Fama, Lars Peter Hansen and Robert Shiller yesterday won the Nobel Prize in Economics for developing methods to study trends in stock, bond and housing markets.
The Royal Swedish Academy of Sciences said that through their separate research, the three had laid the foundation of the current understanding of asset prices and changed the way people invest.
While it is hard to predict whether stock or bond prices will go up or down in the short term, it’s possible to foresee movements over periods of three years or longer, the academy said.
“These findings, which might seem surprising and contradictory, were made and analyzed by this year’s laureates,’’ the academy said.
Fama, 74, and Hansen, 60, are associated with the University of Chicago. Shiller, 67, is a professor at Yale University.
Shiller, an economist famous for having warned against bubbles in technology stocks and housing, said he reacted with disbelief when he got the call from the academy early yesterday.
“People told me they thought I might win. I discounted it. Probably hundreds have been told that,” he said.
Shiller is known for developing the Case-Shiller index, a leading measure of US residential real estate prices, with Karl Case, a Wellesley College economist. He said he believes finance is a structure for society, which if regulated properly is “at the core of our civilization.”
“It seems to some people it’s selfish and money-grubbing. It doesn’t really have to be that way. The financial crisis we’ve been through is traumatic, but we’re learning from it,” Shiller said.
For example, he said many students from other countries are able to study in the US because of financial aid made possible by financial investments. He also said the US Consumer Financial Protection Bureau established as a result of the recession is holding finance to higher standards.
Starting in the 1960s, Fama and others showed how difficult it is to predict individual stock prices in the short run. His findings revolutionized the practice of investing, leading to the emergence of index funds.
Two decades later, Shiller showed that there is more predictability in the long run in stock and bond markets, while Hansen developed a statistical method to test theories of asset pricing.
“These are three very different kinds of people and the thing that unites them all is asset pricing,” says David Warsh, who tracks academic economists on his Economic Principals blog.
US researchers have dominated the economics awards in recent years; the last time there was no American among the winners was in 1999.
The economics award is not a Nobel Prize in the same sense as the medicine, chemistry, physics, literature and peace prizes, which were created by Swedish industrialist Alfred Nobel in 1895. Sweden’s central bank added the economics prize in 1968 as a memorial to Nobel.