3 Win Nobel in Economics

3 American Professors Awarded Nobel in Economic Science

University of Chicago; right, Tami Chappell/Reuters

From left: Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller were awarded the Nobel Memorial Prize in Economic Science on Monday.

WASHINGTON â€" Three American professors â€" Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller â€" were awarded the Nobel Memorial Prize in Economic Science on Monday for competing theories about the movements of asset prices.

The three men, who worked independently, were described as having collectively illuminated the financial markets by showing that stock and bond prices moved unpredictably in the short term but with greater predictability over longer periods. The prize committee said these findings showed that markets were moved by a mix of rational calculus and human behavior.

The decision to honor Mr. Fama and Mr. Shiller as contributors to a shared understanding of financial markets, however, papered over differences in their work that have been enormously consequential in recent years. Mr. Fama was honored for his work in the 1960s showing that market prices are accurate reflections of available information. Mr. Shiller was honored for circumscribing that theory in the 1980s by showing that prices deviate from rationality.

The difference in a nutshell?

Mr. Shiller issued prescient warnings about the housing bubble, while Mr. Fama continued to insist, even after the financial crisis, that prices had been rational. “I don’t even know what a bubble means,” he said in 2010.

Mr. Hansen was honored for technical contributions that have made it easier to evaluate reasons for the movement of asset prices. His work has helped expand the extent to which rational considerations can explain price movements.

Mr. Fama and Mr. Hansen are professors at the University of Chicago; Mr. Shiller is a professor at Yale University. Their work “laid the foundation for the current understanding of asset prices,” according to a statement from the Royal Swedish Academy of Sciences, which awards the annual prize.

Mr. Fama, 74, was honored for showing that asset prices are “extremely hard to predict over short horizons.” His work, beginning in the 1960s, showed that asset prices moved efficiently in the short term, quickly incorporating new information and leaving little opportunity for predictable profits.

The theory basically asserted, in the words of the economist Burton G. Malkiel, that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

It has influenced the way many people invest, contributing to the popularity of index funds that invest in broad, diversified baskets of equities and other assets.

Mr. Shiller, 67, introduced in the early 1980s an important caveat to the idea that markets operate efficiently, finding that stock and bond prices show greater predictability over longer periods. Mr. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making, and instead reflect the irrational behavior of investors.

In 2000, Mr. Shiller published “Irrational Exuberance,” a book that detailed his view that stocks were overvalued at the time. The market crashed soon thereafter.

Mr. Shiller’s work does not contradict Mr. Fama’s findings about the short-term movement of stock prices. But it has helped to underpin a new generation of economic research into the mechanics of bubbles.

The committee also honored Mr. Hansen, 60, for his work in developing a statistical method for testing theories of asset price movements, which has helped to show that risk measures can explain some price changes.

Mr. Shiller, reached by phone during the news conference announcing the award, described his reaction. “Disbelief,” he said. “That’s the only way to put it.”

Mr. Fama, asked whether he had anticipated this moment, said, “I didn’t want to presume that I would win.” He added, “I knew that I would be thrilled, of course.”