Three Americans wins Nobel Prize for Economics

Americans Eugene Fama, Lars Peter Hansen
and Robert Shiller won the Nobel prize for
economics on Monday for developing new
methods to study trends in asset markets.
The Royal Swedish Academy of Sciences
said the three had laid the foundation of
the current understanding of asset prices
by developing a prediction model based on
fluctuations in risk, risk attitudes and how
they interact with behavioral biases and
market friction.
‘The Laureates have laid the foundation for
the current understanding of asset prices,’
the organization said in a statement
announcing the winners.
Mr Fama’s study of the financial markets
began in the 1960s. He soon theorized that,
while stock prices are hard to predict in the
short-term, it is actually less difficult to
predict long-term fluctuations.
He also proved that 'value' and small-cap
stocks provide better returns than 'growth'
stocks, Bloomberg noted.
Building on the revelations made by Mr
Fama, 74, Mr Schiller proved that stock
prices are much more volatile than
dividends paid by a company since they
tend to fall as the ratio between them
grows.
Dividends are based mainly on a company’s
performance, but stock prices can be
influenced by any number of factors, just
one of which is performance.
"These findings, which might seem
surprising and contradictory, were made
and analyzed by this year's laureates," the
academy said.
Mr Schiller’s 1980s proof of theory led to
innovations such as index funds. Similar to
mutual funds, these investment vehicles
have become popular alternatives to
financial advisors for individual investors,
Bloomberg noted.
His findings also apply to the bond
markets.
Further proof of Mr Schiller’s impact on the
financial world are the S&P/Case-Schiller
home price indexes created with Karl Case.
Despite his revolutionary findings, Mr
Schiller was in disbelief he won.
' I did not expect it,' he said via phone
during a press conference announcing the
winners, according to Bloomberg.
Proof of the last decade’s housing bubble
can be seen with home prices doubling in
the years leading up to 2006 before
cratering during the Great Recession.
Building on the work of predecessors, and
in compliment to the two men he shares
this year’s Nobel with, Mr Hansen’s
research led to the rational investor theory.
Mr Hansen set out to show how a rational
investor might react when faced with long-
term asset price uncertainty, and concluded
that borrowing limits and risk restrictions
prevent smart investors from trading in
mispriced markets.
These findings have led to modern risk
controls and long-term risk predictions.
Deviations from this theory are able to
explain buying and selling in just about any
market condition.
Mr Fama and Mr Hansen, 60, are
associated with the University of Chicago.
Mr Shiller, 67, is a professor at Yale
University.
American researchers have dominated the
economics awards in recent years; the last
time there was no American among the
winners was in 1999.
The Nobel committees have now
announced all six of the annual $1.2 million
awards for 2013.
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.
The inventor of dynamite, Mr Nobel died
only a year later.
Sweden's central bank added the
economics prize in 1968 as a memorial to
Nobel.