Once upon a time the person that ended up with the Nobel Prize for whatever it might have been was always the single person to be left standing on the podium in the number one position. Then in 1974, the Nobel Prize for Economics became the only prize in the world where two people could get it and to boot they didn’t even have to agree with each other (Gunnar Myrdal and Friedrich August von Hayek “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena”). The subscript and bumph about the reason why they got the prize had to be sufficiently long-winded to lose everyone along the way and broad enough to cover almost any eventuality in the field of economics. Then, there were prizes that were dished out to groups of people and to organizations even though it was clearly stipulated in the regulations for the awarding of the prize that it should be a single person and not an entity or organization or association of people. Now, the Nobel Prize Committee hasn’t had enough with just two people that disagree with each other. They have given it to three that have never agreed on their respective theorizations about how the economy works. But, as they stand on their podium jostling for a place, vying for coverage by the media at the press conference, all three smile demurely and make out that they are a trio that has been soldered together with some financial market alloy and a bit of economic putty around the edges.
This year on October 14th 2013 the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was attributed to Eugene F. Fama, Lars Hansen and Robert J. Shiller for “their empirical analysis of asset prices”. So, the much-coveted (at least, by those that get given it or that are in the running for it) prize has been awarded to three people for their analyses of the way the financial markets fluctuate. While Fama, Hansen and Shiller were all three obviously named as potential winners, nobody might have imagined that they were going to get given the prize together. Now, awards get given to people for disagreeing with each other. We all deserve a prize then.
- Eugene Fama is probably the most renowned of the three although he was strongly criticized for his efficient-market hypothesis, in which the prices of traded assets reflect the information that has been made available to the public in the past.
- The semi-strong version of the hypothesis states that the price of assets respects all past publically available information and that the prices will fluctuate according to the newly available public information.
- The strong hypothesis states that the price of traded assets can instantly reflect insider information or hidden details that are not available to the public.
But, it was this type of belief in a rational market that reacts according to information rather than also incorporating irrational decisions and effects that was the cause of the financial crisis that knocked the world’s economies for six.
- Robert Shiller believed that Fama’s hypothesis was one of the greatest and most remarkable errors in the history of economic thinking when he wrote in 1984 about the rationality of the markets. Not bad for two people who are now sitting side by side. Let’s agree to disagree?
- Markets were not rational and never have been. They are based on human responses, which in essence are irrational at times.
- 40% of traders according to Shiller suffered from the consequences of emotional stress and reacted according to those emotions rather than rational-decision making.
- Shiller is a behavioral economist who believes that there is a dose of imprecision that is added to decisions through human nature itself.
That in itself is a fundamental difference between Fama and Shiller. One believes that the markets are rational. The second believes that they are not. But what makes it worse is that the two are in total contradiction. Shiller announced in 2005 that there was going to be a housing bubble and an ensuing crisis in the world. He suggested that the stock market would fall by 40%. Even today Fama believes that the housing bubble never existed. He declared “I don’t even know what a bubble means” this year. By giving them both the Nobel Prize the comittee has openly admitted to what is tantamount to saying that nobody can safely say how markets work.
No Great Economists Left
Beyond the fact that there are three economists that have been awarded the Nobel Prize; beyond the surprise that they do not agree with each other there is one nagging question that should come to mind as the three sit there in front of the flashing cameras and the questions savoring their award: how is it possible that only five years after the financial crisis that brought our economies down has the Nobel Prize been awarded to anyone that is remotely connected to the financial markets? Maybe there are no good economists left or maybe there’s a message to the people in there somewhere. Either the committee for the Nobel Prize is much more courageous than we might have thought in doing such a thing, or they are downright in need of another brain transplant. The fact that they have had to attribute the Nobel Prize to three means that none of them was good enough to get it on their own.
The fact that they disagree with each other is even more telling of the complexity of the financial markets. But, it is also very revealing that perhaps there are no more great economists left in the world that can go it alone. Where did the greatness go?
Originally posted: The Nobel Prize: Do We Have to Agree?
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