rationalskepticism.org

Eugene F. Fama, Robert J. Shiller and Lars Peter Hansen shared the 2013 Nobel Prize in Economic Sciences for at times conflicting research on how financial markets work and assets such as stocks are priced.

The three economists, all Americans, “laid the foundation for the current understanding of asset prices,” the Royal Swedish Academy of Sciences, which selects the winner, said today in Stockholm. “It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”

Their work spans almost 50 years of research, beginning with the finding by the University of Chicago’s Fama that it’s difficult to predict price movements in the short run. That conclusion forms the basis for the theory that financial markets are efficient and led to the development of stock-index funds.

Later papers by Shiller and the University of Chicago’s Hansen focused on longer-run price swings and the extent to which they could be explained by such fundamental features as dividend payouts on stocks and the risk appetite of investors. Yale University’s Shiller, in particular, took issue with the argument that investors are always logical, using the phrase “irrational exuberance” to explain run-ups in asset prices...