(B) When I was a kid, we were always laughing at the forecast of the weather on TV. Now, weather forecasts are extremely detailed and accurate. Since I have been investing, I have never found an economist, who can tell me for sure if the economy is growing and so I should sell, or if the economy is slowing down and so I should buy. Out of the three winners of this year Nobel prize in Economy, I am quite familiar with the work of Professor Fama and Shiller but much less familiar with the work of Professor Hansen (so I would not comment on his research). And to be honest, I am a great fan of Professor Shiller.
Every MBA student has to learn Fama’s efficient market hypothesis which led to the development of portfolio theory that considers that stock-price movements are unpredictable and follow a “random walk”.
Professor Schiller has challenged Fama’s efficient-market hypothesis arguing that in a rational stock market, investors would determine stock prices on the expected receipt of future dividends, discounted to a present value. But Professor Shiller demonstrated that the volatility of the stock market was greater than could plausibly be explained by the current value of the dividend streams.
Professor Schiller has been a proponent that volatility in financial markets has strong roots in human psychology, a field now called Behavioral Finance, that can lead to “irrational exuberance” as it was the case with the dot-com bubble in 2000, and the housing bubble in 2008.
Professor Shiller is teaching a free class on Coursera in February 2014 about Financial Markets.
Bloomberg: “Fama, Shiller, Hansen Win Nobel Prize for Asset-Price Work”
NY Times: “Economists Clash on Theory, but Will Still Share the Nobel”
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