Professor Michael McKenzie is Director of External Relations in the University of Liverpool’s Management School
“The 2013 Nobel prize for economics has been jointly awarded to Eugene Fama, Robert Shiller and Lars Peter Hansen for their collective contributions to our understanding of how prices are formed in financial markets.
“At first glance, the combination of Fama and Shiller may seem somewhat incongruous.
“Shiller has done a considerable amount of work showing how investors can often behave irrationally producing speculative bubbles and predictable prices in asset markets.
“Fama, on the other hand, pioneered the Efficient Markets Hypothesis (EMH), which argues that stock price movements are unpredictable and even professional investors will find it hard to gain an advantage in the markets.
“On closer inspection however, Fama and Shiller are actually a lot closer in ideology than many people realise. While Fama argued that it was hard to beat the market, he never argued that prices were correct. The Efficient Markets Hypothesis has always allowed for investors to make mistakes in processing information and to get carried away in their beliefs of how a stock is likely to perform.
“Thus, the ongoing financial crisis is not the nail in the coffin of the EMH that some market commentators would have you believe, but could arguably be attributed to people’s lack of understanding about the true meaning of what it means for a market to be efficient.
“The third recipient of the Nobel prize is Lars Peter Hansen, a Professor at the University of Chicago. Hansen’s most important contribution has been the development of some important techniques which allow us to analyse what drives markets with greater clarity than was previously possible.”
