Congratulations to Eugene Fama (top) and Lars Peter Hansen.
Some details about the men and their work can be found here.
See also, this piece from economist John Cochrane, Gene Fama’s Nobel:
“Efficiency” is not a pleasant adjective or a buzzword. Gene gave it a precise, testable meaning. Gene realized that financial markets are, at heart, markets for information. Markets are “informationally efficient” if market prices today summarize all available information about future values. Informational efficiency is a natural consequence of competition, relatively free entry, and low costs of information in financial markets. If there is a signal, not now incorporated in market prices, that future values will be high, competitive traders will buy on that signal. In doing so, they bid the price up, until the price fully reflects the available information.
Like all good theories, this idea sounds simple in such an overly simplified form. The greatness of Fama’s contribution does not lie in a complex “theory” (though the theory is, in fact, quite subtle and in itself a remarkable achievement.) Rather “efficient markets” became the organizing principle for 30 years of empirical work in financial economics. That empirical work taught us much about the world, and in turn affected the world deeply.
Alex Tabarrok at Marginal Revolution on Hansen.
4 thoughts on “Two Chicago Boyz Win Nobels for Economics”
It was almost embarrassing, with Fama being the most important economist without a Nobel. Picking Krugman over him in 2008 was just spiteful and stupid.
U of Chicago economist John Cochrane posted several posts about Fama and his work, today:
In addition to being a GSB Prof., Cochrane is also Fama’s son in law.
U of C is now claiming 87 Nobelists. They should drop the total to 86 because Hussein’s peace prize was so bogus.
Before anyone gets influenced in his views on markets by the quote about Fama:
He developed a clean model in which markets look fine, and then all the other research (often empirical) was added with more details and models which basically say why markets aren’t efficient.
Much of microeconomic research is indeed about understanding why market results are so very ugly. Market failures have been research subjects since the 19th century.
SO, I don’t think you really understand the efficient markets hypothesis. I suggest you read John Cochrane’s blog on the Nobel awards. http://johnhcochrane.blogspot.com/
Interestingly, Cochrane’s blog (he is Fama’s son-in-law) shows Shiller’s work seemingly contradicting Fama. You reminds me of an old co-worker who claimed he had disproved the efficient markets hypothesis in his Master’s thesis. Somehow, I don’t think he did.
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