Henderson on Fama, Shiller, and Hansen
By David Henderson
Sometimes the Nobel committee seems to make a partly political statement in choosing winners of the prize in economics. Not this year. On Monday, the Royal Swedish Academy of Sciences awarded the 2013 Nobel to three deserving American economists: Eugene Fama and Lars Peter Hansen at the University of Chicago and Robert Shiller of Yale University. The prizes were based on the importance of their work, which “laid the foundation for the current understanding of asset prices.”
This is the opening paragraph of my op/ed, “A Nobel for the Random Walk of Stock Prices,” Wall Street Journal, October 14, 2013.
For all but 5 years since 1996, I’ve written the Wall Street Journal op/ed on the Nobel prize winners in economics. In those 5, either I was traveling and not equipped to do it, or I was not informed enough to do it. Yesterday, I wrote the WSJ piece on Fama, Shiller, and Hansen.
I’ve been waiting for years for Eugene Fama to win, and I’m delighted that he did. Most important, I thought he deserved it long ago and, less important, writing the section on him was easy. I know Shiller’s book, Finance and the Good Society, well, having reviewed it for Regulation. I knew his academic work less well. And I knew little about Hansen.
Another excerpt, emphasizing what is important about Fama’s Nobel for us great unwashed:
One implication of market efficiency is that trading rules, such as “buy when the price fell yesterday,” don’t work. The insight has had big implications for large and small investors: Don’t waste your money on professional financial managers who actively try to pick individual stocks.
One high-profile beneficiary of Mr. Fama’s insight was John Bogle, who started the Vanguard 500 Index Fund in the 1970s. His idea was to have a fund indexed to the overall market and save the costs of hiring experts to predict stock prices. He shared Mr. Fama’s skepticism about golden stock-pickers. The result is that over the past four decades millions of investors who buy index funds from Vanguard and its competitors have saved hundreds of billions of dollars by not paying for dubious investment advice.
When I arrived at the University of Rochester business school in 1975, I quickly learned about Fama’s work from Michael Jensen, John Long, and Clifford Smith. It has paid dividends, so to speak, for my investments over about 30 years.
Particularly helpful to me were three people: George Mason University’s Tyler Cowen and Alex Tabarrok of Marginal Revolution and University of Chicago’s John H. Cochrane, aka The Grumpy Economist. Tyler and Alex always do a great job of telling readers about the Nobel recipients’ work; this time they did even better. In fact, I ran a version of my piece by both Alex and John, to make sure I got things right. John helped me with my understanding of Hansen. I quoted Alex but, in the editing process, it was taken out.
The best explanation of Hansen’s work I’ve seen, which I saw only after my piece was closed, is by Jeff Leek at “Simply Statistics.” My guess is that, even though I understood Hansen better after reading it, I would not have been able, in 100 or so words, to do an adequate explanation.
My quote from Fama on bubbles is from this interview in the New Yorker.