| Peter Klein |
1. I didn’t win.
2. The award is for asset pricing — Gene Fama’s work that underlies the efficient markets hypothesis, Robert Shiller’s contributions to behavioral finance, and Lars Hansen’s development of the Generalized Method of Moments (GMM) regression technique, which is often used in studies of asset prices. (I feel bad for Kenneth French, who could also have won with Fama.)
3. Many people had anticipated a possible Fama-Shiller award, recognizing two people working in the same field but using very different approaches and reaching radically different conclusions, much like the Hayek-Myrdal award of 1974. (Hansen was on the short list for an econometrics award, but not usually bundled with Fama and Shiller.)
4. Fama holds that markets are “rational” and bubbles can’t exist. Shiller holds that markets are irrational and that bubbles are common, resulting from “animal spirits.” As usual, the Austrians take the balanced, reasonable, middle ground, holding that asset bubbles do exist, not because of irrational exuberance, but because of central-bank manipulation of the money supply and interest rates. Down with extremists!
5. Fama’s work on agency theory, while less well known than the efficient markets hypothesis, should be of particular interest to O&M readers. His “Agency Problems and the Theory of the Firm” (1980) argued that competition among managers (current and potential) can help mitigate discretionary behavior, and his “Separation of Ownership and Control” (1983, with Mike Jensen) pointed out that contracts can sometimes substitute for equity ownership in reducing agency costs.
6. I’m not a huge fan of Shiller, but I appreciate his position here:
“Economists seem to miss things that are important” because they’re so busy. “Specialization coupled with strong competitive pressures within academia leads to a situation in which academics often feel that they just do not have time to ponder broad issues and learn even basic simple facts outside their specialty,” the Shiller paper says. “Their general knowledge may be embarrassingly limited, and so they may retreat into their own specialty and produce research which contributes in small ways to the development of the field, but fails to pay attention to the larger picture.”
Update: Here’s a detailed explanation of Fama’s contributions from his Chicago colleague John Cochrane.