Today, the Nobel Prize in Economics was awarded to three American economists: Eugene Fama, Lars Peter Hansen, and Robert Shiller. Marginal Revolution has tag-team brief coverage of all three, and a guest blogger at NoahOpinion delves more deeply into Hansen’s work. Kevin Bryan of A Fine Theorem is insightful here, as usual.
My brief summary of what’s interesting and important about the work of Fama and Shiller (and, to a lesser extent, Hansen, who fits into this picture slightly differently) would be somewhere close to Brad DeLong’s. DeLong hopes the 2013 Nobel will serve as a pedagogical moment for explaining two big truths of financial economics: financial markets aren’t perfect at figuring out what things should be worth in any kind of long-term, societal value sense… but financial markets are incredibly hard to outperform in the short-term. Put differently: in the short-run, you can’t beat the market. In the long-run, the market can beat you (up).
Krugman nicely summarizes the politics of the Prize, or at least one take on those politics:
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.
For a more historical take on the work of Fama in particular and its place in the history of economics and finance, see Donald MacKenzie’s An Engine, Not a Camera. For a critical take on the EMH and its various weak and strong forms, see John Quiggin’s Zombie Economics. As always, Kieran Healy has the last word: