Paul de Grauwe

Nobel Prize for Fama who led millions to believe financial markets are efficient and for Shiller who showed opposite. What a contradiction.

Brad DeLong

I wish we could somehow turn this prize into an opportunity to advance the ball with respect to public knowledge of the economics of finance.

There are two big questions:

1. Suppose you had some kind of societal calculating mechanism to produce co-state variables for assets, enterprises, and extra resources in various states of the world in order to aid in decentralized social planning, and you fed that calculating mechanism up-to-date information on tastes, technologies, the distribution of wealth, and the social welfare function consistent with that distribution of wealth. Would the values such a societal calculating mechanism would come up with if it were efficient be close to the values produced by our financial markets? Answer: NO!
2. If the market efficient in the sense that it is very hard to beat? Answer: YES! You can beat the market–consistently attain surplus over-and-above what you would get from a simple buy-and-hold portfolio calibrated to your risk tolerance–only to the extent that you (a) have different liquidity needs than the market, (b) have a different time preference slope than the market, or (c ) know more than the market in the sense of having better information either about fundamentals or about future market psychology than the investment-weighted average of others’ opinions that are the market’s prices.

Of the three prize recipients, Shiller understands both (1) and (2). It’s not clear to me Fama and Hansen do…

Paul Krugman

It’s an old jibe against economics that it’s the only field where two people can win the Nobel for saying exactly the opposite thing; even the people making that jibe, however, probably didn’t envisage those two guys sharing the same prize, which is kind of what happened here.

But I am actually fine with the prize. Fama’s work on efficient markets was essential in setting up the benchmark against which alternatives had to be tested; Shiller did more than anyone else to codify the ways the efficient market hypothesis fails in practice. If Fama has said some foolish things in recent years, no matter — he did earn this honor, as did Shiller. …

So, all good — and you actually have to admire the prize committee for finding a way to give Fama the long-expected honor without seeming as if they are completely out of touch with everything going on around them.

Tim Harford

Few Nobel-watchers will be surprised at the award of a Nobel Memorial Prize in Economics to Robert Shiller, the man who told us that markets could be irrationally exuberant. He has long been a favourite.

More of a surprise is that Eugene Fama is one of the two men – with Lars Peter Hansen – sharing the prize with Professor Shiller. The old joke about the economics Nobel was that it had been shared by two men who disagreed with each other: Friedrich von Hayek and Gunnar Myrdal. Profs Fama and Shiller, at first glance, are another example: Prof Fama showed that markets were efficient; Prof Shiller showed that they were not.

…

In the light of the financial crisis, the contribution of Prof Shiller to economic thought is obvious. Prof Fama’s is more subtle: if more investors had taken efficient market theory seriously, they would have been highly suspicious of subprime assets that were somehow rated as very safe yet yielded high returns. Any follower of Eugene Fama would have smelled a rat.