2013 Economic Nobel Prize Winners

The 2013 Nobel prize in economics went to three Americans: Eugene Fama, Lars Peter Hansen, and Robert Shiller. The prizes were based on work which “laid the foundation for the current understanding of asset prices.” Fama’s major contribution shows markets are very efficient; work dating back to his 1965 paper, “Random Walks in Stock Market Prices.” Stock prices now move within milliseconds of earnings news.

 

Eugene Fama is a leading advocate of the theory stock prices are efficient. Lars Peter Hansen probes predictive models for statistical weakness. Robert Shiller believes markets are more irrational than efficient. According to the Nobel committee, these three economists show “it is quite possible to foresee the broad course of (stock and bond) prices over…the next 3-5 years.”

 

One beneficiary of Fama’s prize is John Bogle, the 1970s founder of the Vanguard 500 Index Fund. Fama and Bogle both question the cost of actively managed stock portfolios. For the past five decades, Fama and research partner Kenneth French have identified factors that appear to beat the market over long periods: [1] small cap value stocks, [2] momentum stocks with recently rising prices, and [3] highly profitable stocks that earned higher-than-average returns over decades.

 

Fama argues ~ 97% of fund managers have not demonstrated enough skill to even cover the expenses they charge. Fama believes the best strategy is to use low-cost index funds.

 

Robert Shiller set off a revolution in the 1980s by explaining high stock prices relative to earnings signal low subsequent returns and vice versa. This means patient investors should be able to beat the market by betting against short-term market movements.

 

The third Nobel economics price recipient, Lars Peter Hansen, has been able to “boil down all the complex statistical techniques used in understanding economic models” by simply using averages. His Generalized Method of Moments is a standard econometric tool. Hansen has studied tools that work as well as even more economic variables that do not predict market movements.

 

For 2013, the U.S. won nine Nobel prizes; China, with a population of 1.3 billion, has cumulatively received nine Nobel prizes in its entire history. Of those nine, seven now live abroad. Russia, with a population of 142 million, has three living Nobel laureates. Israel, which has 0.2% of the world’s population, has won 20% of all Nobels, including six in 2013. Israel has nine living laureates; three of them live and teach in the U.S. France has 10 living laureates while Germany and the U.K. each has almost 30 (9 of Germany’s laureates live in the U.S.).

 

Since 2000, Americans have won 21 of the 37 physics prizes, 18 of the medicine prizes, and 27 of the 30 economic prizes. Singapore, South Korea, and Finland regularly produce the highest test scores among 15-year-olds, but no one from Singapore has ever won a Nobel; Korea has only won once (for peace) and Finland has not won an award since 1967.