Nobel Prize Winners Tied to Boston
Winners Earned Degrees from MIT, Tufts
Published: Wednesday, October 16, 2013
Updated: Wednesday, October 16, 2013 23:10
On Monday, the Royal Swedish Academy of Sciences awarded the annual Sveriges Riksbank Prize in Economic Sciences—colloquially known as the Nobel Prize in Economics—to three American economists who worked toward a cumulative understanding of the behavior of asset prices and how their shifts in both the short term and long term can be explained and predicted. The winners, Eugene F. Fama, Lars Peter Hansen, and Robert J. Shiller, have strangely conflicting views on how the market works, yet found through separate research that the same fundamental truths hold true about its fickle nature.
Two of the recipients of the award, Fama and Shiller, have local ties to Boston. Fama is a native of the area and both men received their education in the city. Fama, 74, is currently a professor of finance at the University of Chicago’s Booth School of Business, but grew up in blue-collar neighborhoods in Malden and Medford, Mass. before attending Tufts University.
In his years as an undergraduate, he studied romance languages and was planning to become a teacher until his senior year, when one of his professors challenged him to try his hand at economics. He graduated magna cum laude from Tufts in 1960 with recognition as an outstanding student athlete, and went on to receive both his MBA and Ph.D from the Booth School of Business.
Fama, known to many as “the father of modern finance,” provided the basis for the award-winning research when his work, conducted nearly 50 years ago, shed light on the fact that it is very difficult to predict short-term individual stock prices. This discovery gave rise to his “Efficient Market Hypothesis,” which theorizes that in a competitive market, the relevant knowledge of the value of an asset is implicit, so it is impossible to assign or predict the price of an asset.
Robert Shiller, however, argues that behavioral psychology comes into play and the unpredictable nature of human behavior can create large and prolonged mispricings that economists cannot predict. Shiller, who attended the University of Michigan and went on to receive both his S.M. and Ph.D from the Massachusetts Institute of Technology, is currently a professor of economics at Yale University. While he commends Fama for laying the groundwork for illustrating the inability to predict the prices of assets, he disagrees with the reason why, attributing it to a human source of irrationality that shuffles the market. In an interview with The Washington Post following the announcement that he was a recipient of the Nobel Prize, he said, “When I look around, I see a great deal of foolishness, and I can’t believe it’s not important economically.”
Regardless of what causes it, Shiller and Karl Case, an economist from Wellesley College, saw this phenomenon as a demand for a safer type of investment rather than individual assets. They created the Case-Shiller index-pricing system, which allows investors in the housing market to gain a better sense of changes in prices by quantifying them in comprehensible terms.
The third winner, Lars Peter Hansen, is also a professor at the University of Chicago’s Booth School of Business, and posited the findings of Shiller and Fama and developed on his own a statistical method to test theories of asset pricing, including those of his co-recipients.
While each man contributed something slightly different to the world of economics, they had one thing in common: they were surprised and slightly flustered upon receiving the award: Hansen told The Boston Globe he was not sure how he was going to celebrate, but he was “still working on taking a deep breath.” In a comment to the Associated Press, Shiller admitted, “People told me I might win. I discounted it. Probably hundreds have been told that.”
The winners will share the $1.23 million prize, which has been awarded to at least one American economist every year since 1999. In the words of the academy responsible for giving the award, “Their methods have shaped subsequent research in the field and their findings have been highly influential both academically and practically.”