Nobel awarded to Fama and Hansen
The winners of the 2013 Nobel Memorial Prize in Economic Sciences, faculty members Eugene F. Fama (left) and Lars Peter Hansen, with President Robert J. Zimmer in background.
Professors cited for groundbreaking economics research
University of Chicago professors Eugene F. Fama and Lars Peter Hansen have been awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013.
The Royal Swedish Academy of Sciences honored Fama and Hansen, along with Robert J. Shiller of Yale University, “for their empirical analysis of asset prices.” This research helps to explain how and why the prices of stocks and bonds change over time. Fama’s work demonstrated that new information is very quickly incorporated into the market, making it difficult to predict short-term changes in asset prices. Hansen developed a statistical method for testing rational theories of asset pricing like those advanced by Fama and Shiller.
"In their work, Gene Fama and Lars Hansen have demonstrated the University's mission to address the complex challenges facing society with innovative scholarship. In doing so, they have helped shape the study of economics and the nature of today's financial markets. We are very gratified to see those accomplishments recognized internationally, and proud to count them among the Nobel laureates at the University of Chicago,” said Robert J. Zimmer, president of the University of Chicago.
Fama is the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business; Hansen is the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the College, and is research director of the Becker Friedman Institute for Research in Economics. They are among the 89 scholars associated with the University to receive Nobels, and among the 28 who have received the Nobel Memorial Prize in Economics. In addition to Fama and Hansen, four current faculty members are Nobel laureates in economics: Profs. Roger Myerson (who won in 2007), James Heckman (2000), Robert E. Lucas Jr. (1995), and Gary Becker (1992).
At a news conference on Monday morning, Fama credited much of his success to the intellectual culture of the University of Chicago.
“Whatever I am owes two-thirds—maybe three-quarters, maybe 90 percent—to the University of Chicago,” Fama said. “Over the years, the school [and] the economics department has only gotten stronger. The interaction that you get from your colleagues is so influential in building your work that you cannot underestimate its impact.”
Hansen, too, said his colleagues were essential in guiding his approach to research. “This environment here really is something special,” Hansen said. From his mentors and colleagues in the University’s Department of Economics, he learned that “economics is supposed to do something—it’s supposed to explain the world.”
'A great day for Chicago economics'
Members of the University community crowded into the soaring Rothman Winter Garden of the Charles M. Harper Center on Monday morning to hear from the two winners and their colleagues.
“Today is a great day for Chicago economics,” Prof. John List told the cheering crowd.
At the event, Fama and Hansen’s colleagues praised the far-reaching impact of the two laureates’ research.
Hansen’s “powerful, pioneering” methods for assessing economic models have been adopted by social scientists in many fields, said List, the Homer J. Livingston Professor and chair of Economics. “Whether it is to explore how public policies effect unemployment rates, how networks form, or how environmental regulations influence productivity growth, Lars’ work plays a key role.”
Fama’s early work on efficient markets, which gave rise to the index funds many investors participate in today, not only revolutionized academic finance, but also made “a phenomenal impact on the practical world, and really on people’s lives,” said John Heaton, the Joseph L. Gidwitz Professor of Finance and Deputy Dean for Faculty at Chicago Booth.
Heaton also praised Fama’s commitment to his students, noting that Fama spent his first morning as a Nobel laureate teaching a course on portfolio theory and asset pricing.
When he received the call from the Nobel committee, “I was preparing my class, actually,” Fama said.
For his part, Hansen said he was looking forward to meeting with several graduate students later in the afternoon.
“I’ve been very lucky to have a long list of very good graduate students. I’m very proud of this,” he said. “Most of my best students are happy to tell me where I’m wrong and more than happy to expose the gaps in my understanding. My graduate students over the years—current and former ones—have been some of my best colleagues.”
“I can’t distinguish between students and colleagues,” agreed Fama. Former students become colleagues who “contribute to your work through their work, or through commenting on your work. There’s a continuous interchange.”
Understanding trends in asset markets
The work the Nobel honors had roots in the 1960s, when Fama and his collaborators made pivotal contributions concerning the difficulty of predicting stock prices in the short run.
“These findings not only had a profound impact on subsequent research but also changed market practice,” notes the Nobel announcement for the 2013 prize.
“As a pioneering researcher and teacher, Gene embodies the highest aspirations of Chicago Booth, to create knowledge with enduring impact, and to influence and educate current and future leaders,” said Sunil Kumar, dean of Chicago Booth and the George Pratt Shultz Professor of Operations Management. “We are honored to have him as a member of the Booth community, now in his 50th year with us, and we congratulate him on this well-deserved achievement.”
Hansen’s research examines the connection between the macroeconomy and financial markets. His statistical assessments of economic models “go a long way toward explaining asset prices,” the Nobel announcement stated.
Mario Small, dean of the Social Sciences Division and professor in Sociology, said that Hansen “has proven himself year after year to be a creative econometrician, sophisticated empirical researcher, and broad-minded intellectual. He developed important methods to estimate economic models in conditions where previous models were inadequate to meet the complexity of the real world. His work has furthered our understanding of consumption and asset pricing.”
“This award is recognition that he long-ago joined the ranks of the most important economists in the illustrious history of University of Chicago economics,” Small added.
Eugene F. Fama
Fama joined the University of Chicago faculty in 1963 as he was completing his PhD in economics and finance at what was then called the Graduate School of Business.
His research includes theoretical and empirical work on investments, price formation in capital markets, and corporate finance.
Fama teaches “Theory of Financial Decisions,” a PhD course that many MBA students also take. Some former students, including David Booth, an investment fund manager, have called Fama’s course a life-changing experience. Booth cited Fama as his primary influence and credited Fama with his success in 2008, when Booth gave a $300 million gift to the University.
Fama coined the term “efficient market” and the term gained widespread use following publication of “Efficient Capital Markets: A Review of Theory and Empirical Work” in the Journal of Finance in 1970. The efficient markets hypothesis holds that, as a result of competition, equilibrium prices in financial markets incorporate all relevant information. A famous implication of this hypothesis is that simple strategies cannot beat stock markets, bond markets, and international currency markets.
Fama subsequently developed and tested many propositions about prices in efficient markets, the effect of inflation and other macroeconomic factors on bond prices, and how the structure of corporations affects investment and other decisions. His recent work has shown that prospective stock and bond returns vary through time, and has redefined our understanding of which stocks pay greater returns than others.
In addition to publishing nearly 100 academic research papers on finance, Fama has written two widely used textbooks, The Theory of Finance (with Merton Miller) in 1972, and Foundations of Finance in 1976. His work is among the most cited in all of economics and finance.
Fama received the inaugural Onassis Prize in Finance sponsored by the Onassis Public Benefit Foundation of Greece in April 2009 in recognition of a lifetime contribution to the study of finance by a leading academic, the inaugural Morgan Stanley American Finance Association Award for Excellence in Finance in 2007, and the 2006 Nicholas Molodovsky Award from the CFA Institute, presented for “outstanding contributions to the investment profession of such significance as to change the direction of the profession and raise it to higher standards of accomplishment.”
He was awarded the inaugural Deutsche Bank Prize in Financial Economics in April 2005. The award honors an internationally renowned researcher who has excelled through influential contributions to research in the fields of finance and macroeconomics, and whose work has led to practice and policy-relevant results.
In 2001, Fama became the first person to be elected a fellow of the American Finance Association. He also is a fellow of the American Academy of Arts and Sciences.
Since 1982, Fama has been a board member of Dimensional Fund Advisers, a fund management company started by David Booth and Rex Sinquefield, two MBA graduates of Chicago Booth. Fama’s research is the basis of most of DFA’s bond products, and his stock market research with Kenneth French is the foundation of the firm’s approach to stock investments.
Included among his honorary degrees is a Doctor of Science Honoris Causa in 2002 from Tufts University where he received his bachelor of arts degree in 1960 before he earned his MBA and PhD at the University of Chicago Booth School of Business.
Fama was born in Boston on Feb. 14, 1939. He and his wife Sally have four children and 10 grandchildren.
Lars Peter Hansen
Hansen is one of the world’s leading experts in economic dynamics. He is internationally recognized for making fundamental advances in the use of statistical methods to assess dynamic economic models and to enhance our understanding of how economic agents cope with changing and risky environments.
Hansen’s research looks at ways to bridge the gap between economic models and economic and financial data. His work has led to improved methods for formulating, analyzing and testing dynamic economic models in environments with uncertainty. He has applied these methods to study the determinants of consumption, savings and security market prices.
In the 1980s, Hansen became the leading contributor to the development and application of rigorous estimation and testing methods for financial data. His 1982 Econometrica paper, “Large Sample Properties of Generalized-Methods of Moments Estimators,” fundamentally altered the way that empirical research is done in finance and macroeconomics.
This new methodology led him, with Ken Singleton, to make one of the pioneering contributions to what became known as the “equity premium puzzle.”
Hansen continues to be a prolific researcher. His recent work focuses on models that incorporate ambiguities, beliefs and skepticism of consumers and investors; specifically, he is exploring how these models can explain economic and financial data to understand the consequences of policy options. He is also principal investigator on a research project that has assembled a group of elite economists to develop macroeconomic models with enhanced linkages to the financial sector. These models will provide more powerful policy tools for measuring and monitoring systemic risks to the economy arising from financial markets.
Since 1981 Hansen has served on the faculty of the University of Chicago’s Department of Economics, where he was the former director of graduate studies and chairman. He serves as research director for UChicago’s Becker Friedman Institute for Research in Economics.
He is the recipient of the 2006 Erwin Plein Nemmers Prize in Economics from Northwestern University. In making the announcement, the selection committee said it was giving recognition “for rigorously relating economic theory to observed macroeconomic and asset market behavior and for innovations in modeling optimal policy under uncertainty.” Hansen also won the 2008 CME Group MSRI Prize and the 2010 BBVA Foundation Frontiers of Knowledge Award in Economics, Finance, and Management.
He is a member of the American Academy of Arts and Sciences, a fellow of the National Academy of Sciences and a former president of the Econometric Society. He is a former John Simon Guggenheim Memorial Foundation Fellow and Sloan Foundation Fellow.
Along with fellow Nobel Laureate Thomas Sargent and others, Hansen has recently developed methods for modeling economic decision-making in environments in which uncertainty is hard to quantify. They explore the consequences for models with financial markets and characterize environments in which the beliefs of economic actors are “fragile.”
Currently, Hansen is contributing his expertise on decision-making under uncertainty to a collaborative effort as part of the Center for Robust Decision Making on Climate and Energy Policy (RDCEP) headed by Ian Foster, the Arthur Holly Compton Distinguished Service Professor in Computer Science, to develop dynamic economic models in which economic activity could influence the climate. He is a senior fellow of the University of Chicago’s Computation Institute.
Hansen received a BS in mathematics in 1974 from Utah State University and a PhD in economics in 1978 from the University of Minnesota.
By Susie Allen
October 6, 2013
Photo by Robert Kozloff