The 2013 Nobel Prize in Economics winners were announced
earlier this week and the award was shared by three U.S. Economists for their
work on asset pricing. Eugene
Fama of the University of Chicago, Lars
Peter Hansen of the University of Chicago and Robert Shiller of Yale University
share this year’s prize for their separate contributions in economics research.
The work of the
three economics is summarized very elegantly in the
summary publication produced by The Royal Swedish Academy of Sciences
titled “Trendspotting in asset markets”. The combined economic contribution of the
three researchers is described below:
The behavior of asset prices is essential for many important
decisions, not only for professional investors but also for most people in
their daily life. The choice on how to save – in the form of cash, bank deposits
or stocks, or perhaps a single-family house – depends on what one thinks of the
risks and returns associated with these different forms of saving. Asset prices
are also of fundamental importance for the macroeconomy, as they provide
crucial information for key economic decisions regarding consumption and
investments in physical capital, such as buildings and machinery. While asset
prices often seem to reflect fundamental values quite well, history provides
striking examples to the contrary, in events commonly labeled as bubbles and crashes. Mispricing of assets may contribute to financial crises and, as the
recent global recession illustrates, such crises can damage the overall
economy. Today, the field of empirical asset pricing is one of the largest and
most active subfields in economics.
This year’s award has
several implications for those of us interested in the legal side of law and
economics. First, Fama is the
grandfather of the efficient capital market hypothesis, the foundation for
fraud on the market, a economics elements incorporated into securities fraud
litigation.
Second, Fama’s inclusion in the award is being heralded by some as
a win, or vote of confidence, for free
marketers whose regulatory view (that markets should be largely
unregulated) rests on the fundamental assumption that markets are efficient. On the other hand, Shiller’s inclusion in the
award challenges the coup that can be claimed by free marketers because Shiller
has long questioned the efficiency of the markets. John
Cassidy at The New Yorker writes “Shiller, in showing that the stock market bounced up and down a lot more
than could be justified on the basis of economic fundamentals such as earnings
and dividends, kept alive the more skeptical and realistic view of finance that
Keynes had embodied in his “beauty contest” theory of investing.” Market efficiency, or lack thereof, are key
arguments against and for market regulations.
Trends in support for either theory or validation of one could signal
future approaches to regulation.
Finally,
the focus on asset pricing, particularly Fama’s work has some potential
implications for the mutual fund industry.
Fama’s efficiency view of the markets largely discounts the value of
actively managed funds, once costs and annual fees are deducted because the
market, if efficient, cannot consistently be beaten. This last thread regarding fund management is
a theme woven into some of my more recent research on the regulations, risks,
and ownership anomalies facing retirement investors. More on this later, with links to newly
published papers of course, but for now read the Nobel summary document
included above and briefly contemplate taking the time to audit an economics
course next semester—I am going to browse the b-school catalogue now.
-Anne Tucker