WASHINGTON: The economist Robert J Shiller in 2005 described the rapid rise of housing prices as a bubble and warned that prices could fall by 40 percent.
Five years later, with home prices well on the way to fulfilling Shiller's prediction, the economist Eugene F Fama said he still did not believe there had been a bubble.
"I don't even know what a bubble means," said Fama, the author of the theory that asset prices perfectly reflect all available information. "These words have become popular. I don't think they have any meaning."
The two men, leading proponents of opposing views about the rationality of financial markets - a dispute with important implications for investment strategy, financial regulation and economic policy - were joined in unlikely union Monday as winners of the Nobel Memorial Prize in Economic Science.
Fama's seminal theory of rational, efficient markets inspired the rise of index funds and contributed to the decline of financial regulation. Shiller, perhaps his most influential critic, carefully assembled evidence of irrational, inefficient behavior and gained a measure of fame by predicting the fall of stock prices in 2000 as well as the housing crash that began in 2006.
They will share the award with a third US economist, Lars Peter Hansen, who developed a method of statistical analysis to evaluate theories about price movements that is now widely used by other social scientists.
The three economists, who worked independently, were described as collectively illuminating the workings of financial markets by showing that stock and bond prices move unpredictably in the short term but with greater predictability over longer periods. The prize committee said these findings showed that markets were moved by a mix of rational calculus and irrational behavior.
Fama and Hansen are professors at the University of Chicago, known as the principal home of free market economics; Shiller is a professor at Yale University. Their work "laid the foundation for the current understanding of asset prices," according to a statement from the Royal Swedish Academy of Sciences, which awards the annual prize.
Yet in jointly honoring the work of Fama and Shiller, the committee also highlighted how far the economics profession remains from agreeing on the answer to a basic and consequential question: How do markets work?
"It encapsulates the state of modern economics," said Justin Wolfers, an economist at the University of Michigan. "We have big important questions that remain largely open and we have giants bringing evidence to bear. And the answer turns out to be more complicated than markets are efficient - or markets are inefficient."
The dispute is not merely academic. The deregulation of financial markets beginning in the 1980s was justified by the view that markets are rational and efficient. Complacence about rising home prices in the 2000s similarly reflected the view that prices are inherently rational. In the aftermath of the crisis, conversely, the work of Shiller and other proponents of behavioral economics - the integration of psychology into economic models - has been influential in shaping an intensification of financial regulation. And Federal Reserve officials are now debating whether bubbles can be identified and when they should be popped.
Five years later, with home prices well on the way to fulfilling Shiller's prediction, the economist Eugene F Fama said he still did not believe there had been a bubble.
"I don't even know what a bubble means," said Fama, the author of the theory that asset prices perfectly reflect all available information. "These words have become popular. I don't think they have any meaning."
The two men, leading proponents of opposing views about the rationality of financial markets - a dispute with important implications for investment strategy, financial regulation and economic policy - were joined in unlikely union Monday as winners of the Nobel Memorial Prize in Economic Science.
Fama's seminal theory of rational, efficient markets inspired the rise of index funds and contributed to the decline of financial regulation. Shiller, perhaps his most influential critic, carefully assembled evidence of irrational, inefficient behavior and gained a measure of fame by predicting the fall of stock prices in 2000 as well as the housing crash that began in 2006.
They will share the award with a third US economist, Lars Peter Hansen, who developed a method of statistical analysis to evaluate theories about price movements that is now widely used by other social scientists.
The three economists, who worked independently, were described as collectively illuminating the workings of financial markets by showing that stock and bond prices move unpredictably in the short term but with greater predictability over longer periods. The prize committee said these findings showed that markets were moved by a mix of rational calculus and irrational behavior.
Fama and Hansen are professors at the University of Chicago, known as the principal home of free market economics; Shiller is a professor at Yale University. Their work "laid the foundation for the current understanding of asset prices," according to a statement from the Royal Swedish Academy of Sciences, which awards the annual prize.
Yet in jointly honoring the work of Fama and Shiller, the committee also highlighted how far the economics profession remains from agreeing on the answer to a basic and consequential question: How do markets work?
"It encapsulates the state of modern economics," said Justin Wolfers, an economist at the University of Michigan. "We have big important questions that remain largely open and we have giants bringing evidence to bear. And the answer turns out to be more complicated than markets are efficient - or markets are inefficient."
The dispute is not merely academic. The deregulation of financial markets beginning in the 1980s was justified by the view that markets are rational and efficient. Complacence about rising home prices in the 2000s similarly reflected the view that prices are inherently rational. In the aftermath of the crisis, conversely, the work of Shiller and other proponents of behavioral economics - the integration of psychology into economic models - has been influential in shaping an intensification of financial regulation. And Federal Reserve officials are now debating whether bubbles can be identified and when they should be popped.
No comments:
Post a Comment