Robert Shiller, the Yale professor whose work in economics led to the development of the S&P/Case-Shiller Index, a widely used measure of home prices, was awarded the Nobel Memorial Prize in Economic Science on Monday.
Shiller will share the Nobel Prize, along with the $1.23 million in prize money, with Eugene Fama and Lars Peter Hansen, both professors with the University of Chicago, who were also honored by the Royal Swedish Academy of Sciences for their work in economics.
Shiller, known for predicting bubbles in technology stocks and housing, is a pioneer in the field of ‘behavioral economics,’ the study of how human psychology can affect results in the financial markets that cannot be predicted through traditional economic forecasting.
Fama, on the other hand, is the father of the ‘efficient markets hypothesis,’ the idea that because markets are very good at incorporating all known information about the value of an asset, it can be a fool's errand to try to predict in what direction the price of a stock or bond will go.
In most respects, the theories the two men developed are diametrically opposed, in that one asserts that markets are predictable, while the other asserts that they are not.
Fama questions whether "bubbles" exist and says the word ‘bubble’ has no meaning, whereas Shiller says bubbles are common, plain to see and easy to predict.
Fama has said in past interviews that there was no housing bubble in 2006 and even maintained that perspective in the years that followed the crash.
Shiller, on the other hand, correctly warned of a stock market bubble in the late 1990s and predicted the housing bubble before the crash in 2008.
Hansen, meanwhile, augmented Shiller's work by layering on statistical methods that can be used to test and discover factors that drive stock price volatility. His work established the theory that investor appetite, coupled with perceived risk, has more to do with market volatility than investors' emotions. When times are bad, for example, investors are more cautious – when times are good, they are willing to pay higher prices for assets.
In issuing the joint award, the Nobel committee has recognized that these separate, yet inter-related, schools of thought have played a critical role in how economists develop an understanding of what drives asset prices.
For more, check out this report in the Washington Post.