Question

1. Soon after it was announced in 2013 that Eugene Fama, Lars Hansen, and Robert Shiller had jointly won the Nobel Prize in Economics, someone at Berkeley wrote to the New York times:

Raj Chetty’s argument that, despite the differences between the Nobel winners Robert J. Shiller and Eugene F. Fama, economics is nonetheless a science just like medicine will be vindicated when the Nobel Prize in Medicine is given to two doctors, one of whom accurately predicts the occurrence of heart attacks and the other who declares that heart attacks don’t exist.

PAUL DUGUID
Berkeley, Calif., Oct. 21, 2013

What was his point in this paragraph, and what does it say about the research of the three Nobel winners? Explain.

Answer 1

The paragraph states that three economists with conflicting view over the rationality of the financial market were awarded with the Nobel prize for their "empirical analysis of asset pricing."

According to Shiller, investors, being human, can be swayed by psychology. Fama contends markets are always efficient, with people incorporating all available information into prices.

Fama is the father of efficient market theory and Shiller is the father of inefficient market. Efficient market hypothesis holds that the prices of stocks and bonds are rational because they reflect all available public knowledge about those securities at any given point in time. Professor Shiller, however, believed in persistant irrationality in such markets. According to him, the value of securities tend to jump around much more than the expected value of their future expected stream of dividend payment. Mr. Shiller also predicted the fall of stock prices in 2000 as well as the housing crash that began in 2006.

Lars Peter Hansen was recognised for his contributions to the statistical tools that have become essential in the empirical assessment of theories like those put forward by Fama and Shiller.