The Nobel(ish) Prize in economics was awarded Monday jointly to three well-known economists—Eugene Fama, Lars Peter Hansen, and Robert Shiller—all of whom have been widely discussed as potential Nobelists but who I think few of us would have imagined sharing the prize.
Of the three, Fama’s work is the easiest to present. Starting in the 1960s he led the research program behind the “Efficient Markets Hypothesis,” the notion that new information is very rapidly assimilated into asset prices and that there’s no form of technical analysis that lets you predict their swings. Shiller is best known for what’s normally thought of as the precise opposite line of research. His work in behavioral finances examines individual investors’ tendency to bandwagon (buy high and sell low) and financial markets’ tendency to gyrate wildly around fairly predictable long-term fundamental trends.
Lars Peter Hansen, unfortunately for the economics writers of the world, is known primarily for his innovations in mathematical methodology. His generalized method of moments is part of the toolkit of time series econometrics that’s widely used by economists. The specific case for putting him in the troika is that the generalized method of moments is widely used to analyze asset price movements.
And even though Hansen’s work is the least accessible of the three, his inclusion is important to understanding the overall thrust of the award, which is really about empirical research into financial markets. Fama is still very much an efficient markets guy (see his 2007 interview with the Minneapolis Federal Reserve’s in-house magazine), but his later work like the development of the Fama-French three-factor asset pricing model is well-regarded outside that particular silo. And Shiller, despite being a student of bubbles, is also very much someone who respects the role of finance in society. The lines of research from Fama, Hansen, and Shiller are all rather different, but they’re all groundbreaking empirical investigations of the same basic issue—what happens with financial market prices and why.