Stockholm: Three US academics got the Nobel Economic Prize Monday for research on financial markets, an area of immense real-world implications following the crises rattling the global economy in recent years.
Robert Shiller, Eugene Fama and Lars Peter Hansen won the coveted award for groundbreaking work on spotting trends in markets, the jury said.
The three “have laid the foundation for the current understanding of asset prices. It relies in part on fluctuations in risk and risk attitudes, and in part on behavioural biases and market frictions,” the Royal Swedish Academy of Sciences said.
Shiller, 67, is a professor at Yale University, while Fama, 74, and Hansen, 61, are both professors at the University of Chicago.
The award is for work done on the value of assets, such as stocks and bonds, and comes as the global economy is still reeling from the effects of the financial market crisis at the end of the last decade.
Shiller, who spoke to the Swedish academy shortly after receiving the prize, said finance “has a body of knowledge that is useful to society.”
The current crisis “reflected mistakes and imperfections in our financial system that we are already working on correcting,” he said.
The three were awarded for “surprising and contradictory” findings showing that the prices of stocks and bonds and other assets are easier to predict in the long term than in the short term.
“There is no way to predict the price of stocks and bonds over the next few days or weeks,” the academy said.
“But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years.”
Shiller, who has been frequently cited as a possible winner over the past few years, published the book “Irrational Exuberance” in 2000, predicting the bursting of the dotcom bubble.
Ironically for a scholar who has devoted his career to the study of predictions, Shiller said he had not foreseen that he would get the Nobel Prize.
“I’m aware that there are so many worthy people that I had discounted it. So no, I did not expect it,” he said.
Beginning in the 1960s, 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, the academy said.
“The idea is really, how do you measure risk, and if the market is pricing things correctly, what is the relation between expected return — which is the compensation for risk — and risk,” Fama said in an interview with the official Nobel Prize website.
Hansen developed a statistical method that is well suited to testing theories of how rational investors respond to uncertainty in asset prices.
“Investors respond to information and struggle with what’s the right view of the world,” Hansen, who referred to himself as the “youngster” in the trio, told the website.
“It gives ways to capture those struggles and how they reflect in asset markets.”
Fama, Hansen and Shiller will share the prize sum of eight million Swedish kronor ($1.2 million, 910,000 euros).
The economics prize is the only Nobel not originally included in the last will and testament of the prizes’ creator, Swedish scientist and philanthropist Alfred Nobel.
It was established in 1968 by the Swedish central bank to celebrate its tricentenary, and first awarded in 1969. The other prizes have been awarded since 1901.
The University of Chicago, employer of two of Monday’s winners, has produced more Nobel Economics Prize winners than any other institution — 12 out of 74 laureates since the award was introduced.
“Maybe they are more singularly focused on academic research,” said Peter Krusell, chairman of the Nobel economics committee.
“The professors there are not primarily public figures doing policy work. They’re researchers that doggedly pursue ideas in a direction that maybe no one else is.”
Last year, US scholars Alvin Roth and Lloyd Shapley won for their work on the functioning of markets and how best to match supply and demand.
The economics prize winds up this year’s Nobel season, marked by awards in physics to the fathers of the Higgs boson, the literature prize to Canadian short story author Alice Munro, and the peace prize to the UN-backed Organisation for the Prohibition of Chemical Weapons.
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