Three Americans won the Nobel prize in economics Monday for their sometimes-contradictory insights into the complexities of investing.
Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University were honoured for shedding light on the forces that move stock, bond and home prices — findings that have transformed how people invest.
The three American economists have won the 2013 Nobel in economics "for their empirical analysis of asset prices," the Stockholm-based award-giving body said today.
The Royal Swedish Academy of Sciences cited the three for developing new methods to study trends in asset markets, saying they had laid the foundation of current understanding of asset prices.
While it's hard to predict whether stock or bond prices will go up or down in the short term, it's possible to foresee movements over periods of three years or longer, the academy said.
"These findings, which might seem surprising and contradictory, were made and analyzed by this year's laureates," the academy said.
American researchers have dominated the economics awards in recent years; the last time there was no American among the winners was in 1999.
Fama, 74, and Hansen, 60, are associated with the University of Chicago. Shiller, 67, is a professor at Yale University.
Fama showed in the 1960s how hard it is to predict markets in the short run, while Shiller two decades later showed how it can be done in the long run. Hansen developed a statistical method to test theories of asset pricing.
For their separate research, the three economists shared the $1.2-million prize -- the last of this year's Nobel awards to be announced.
"Their methods have shaped subsequent research in the field and their findings have been highly influential both academically and practically," the Royal Swedish Academy of Sciences said.
Hansen said he received the phone call from Sweden when he was on his way to the gym. He said he's not sure how he'll celebrate but he's "still working on taking a deep breath."
Shiller, an economist famous for having warned against bubbles in technology stocks and housing, said he reacted with disbelief when he got the call.
"People told me they thought I might win. I discounted it. Probably hundreds have been told that," he said to The Associated Press.
Fama helped revolutionize the practice of investing by showing it was difficult to predict individual stock prices in the short run. That led to the emergence of index funds as a common investment.
Shiller showed that there's more predictability in stock and bond markets in the long run. That encouraged the creation of institutional investors, such as hedge funds, that take bets on market trends.
Researcher 'proven right'
In the late 1990s, Shiller said the stock market was overvalued "and lo and behold, he was proven right" when the dot com bubble burst in 2000, said Nobel committee secretary Peter Englund.
"He also predicted for a long time that the housing market was overvalued and again he was proven right," Englund said.
The U.S. property market suffered a crash in 2007 that helped fuel the global financial crisis.
'The financial crisis we've been through is traumatic, but we're learning from it.' - Robert Shiller, Yale University professor, among Nobel in economics recipients
Englund said he believes the three laureates agree on the findings for which they were awarded. However, Fama and Shiller have different "interpretations of the real world," he added.
"It's no secret that for Eugene Fama the sort of null hypothesis is that markets work well and he is willing to believe that until he is proven otherwise whereas for Robert Shiller, I think his null hypothesis is that there are periods of excessive optimism and pessimism," Englund said.
Shiller is known for developing the Case-Shiller index, a leading measure of U.S. residential real estate prices, with Karl Case, a Wellesley College economist.
Hansen in the 1980s developed a statistical method to better evaluate theories such as those of Fama and Shiller.
"These are three very different kinds of people and the thing that unites them all is asset pricing," says David Warsh, who tracks academic economists on his Economic Principals blog.
Fama said his work came at a time when computers were beginning to be used by statisticians and economists, many of whom were studying stock prices because they were the most easily available data to come by.
He was getting ready to teach his first class as a Nobel laureate Monday morning. Asked whether his students would get a break, he said: "We'll see, but they're going to get an exam tomorrow anyway. They paid their money, they're gonna get the full pill."
Shiller defended finance as a part of society, arguing that if regulated properly it is "at the core of our civilization.
"It seems to some people it's selfish and money-grubbing. It doesn't really have to be that way. The financial crisis we've been through is traumatic, but we're learning from it," Shiller said.
Winners of 6 Nobel awards include Canadian
The Nobel committees have now announced all six of the annual $1.2-million awards for 2013.
The economics award is not a Nobel Prize in the same sense as the medicine, chemistry, physics, literature and peace prizes, which were created by Swedish industrialist Alfred Nobel in 1895. Sweden's central bank added the economics prize in 1968 as a memorial to Nobel.
Here's a look at the other winners this year:
Literature: Canadian author Alice Munro, hailed by the award-giving Swedish Academy as a "master of the contemporary short story." The 82-year-old writer is often called "Canada's Chekhov" for her astute, unflinching and compassionate depiction of seemingly unremarkable lives. Her collections chronicling the lives of girls and women before and after the 1960s social revolution include The Moons of Jupiter, The Progress of Love and Runaway.
Nobel Peace Prize: The Organization for the Prohibition of Chemical Weapons, the investigation and enforcement arm for a 1997 treaty banning the use of chemical weapons. Based in The Hague, the global chemical weapons watchdog deploys teams worldwide to identify whether all 190 nations that have signed the treaty are disclosing all chemical weapons stocks and, if possessing them, destroying both the weapons and their manufacturing sites. An OPCW mission is currently planning the destruction of chemical weapons stockpiles and facilities in Syria, the most recent nation to accept the arms-control accord.
Chemistry: Three U.S.-based scientists for developing computer models that can predict chemical reactions for use in creating new drugs and other tasks. Their approach combined classical physics and quantum physics. The winners are Martin Karplus of the University of Strasbourg, France, and Harvard University; Michael Levitt of the Stanford University School of Medicine, and Arieh Warshel of the University of Southern California in Los Angeles.
Physics: Peter Higgs of Britain and Francois Englert of Belgium for their 1964 theory, advanced independently of each other, about how subatomic particles get their mass. Their theory made headlines last year when the CERN laboratory in Geneva confirmed it by discovering the so-called Higgs particle.
Medicine: Three U.S.-based researchers for their breakthroughs in understanding how key substances move within a cell. They developed better understanding of vesicles, tiny bubbles that deliver their cargo within a cell to the right place at the right time. Disturbances in that delivery system can lead to neurological diseases, diabetes or immunological disorders. The prize was shared by Americans James E. Rothman of Yale University and Randy W. Schekman of the University of California at Berkeley, and German-American Dr. Thomas C. Sudhof of the Stanford University School of Medicine.