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5 December 2013 11:26 am ,
Vol. 342 ,
At age 30, Dutch biologist Freek Vonk has built up a respectable career as a snake scientist. But in his home country,...
Since arriving on the island of Guam in the 1940s, the brown tree snake ( Boiga irregularis ) has extirpated native...
An animal rights group known as the Nonhuman Rights Project filed lawsuits in three New York courts this week in an...
Researchers have been hot on the trail of the elusive Denisovans, a type of ancient human known only by their DNA and...
Thousands of scientists in the Russian Academy of Sciences (RAS) are about to lose their jobs as a result of the...
Dyslexia, a learning disability that hinders reading, hasn't been associated with deficits in vision, hearing, or...
Exotic, elusive, and dangerous, snakes have fascinated humankind for millennia. They can be hard to find, yet their...
Researchers have sequenced and analyzed the first two snake genomes, which represent two evolutionary extremes. The...
- 5 December 2013 11:26 am , Vol. 342 , #6163
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Stock-Pricing Theorists Reap Economics Nobel
14 October 2013 10:15 am
Predicting how stock prices will rise or fall, everybody knows, is worth a fortune. Understanding the predictability of stock prices, too, can net you a pretty rich dividend, as Eugene Fama, Lars Peter Hansen, and Robert Shiller can tell you this morning. The three have together won the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (informally, the Nobel Prize in economics) “for their empirical analysis of asset prices.” Fama and Hansen are professors at the University of Chicago; Shiller is a professor at Yale University.
In the 1960s, Fama and his colleagues showed that it was impossible to predict stock prices in the short term because any new information that might influence a particular stock—such as new, tougher environmental regulations affecting the oil industry—was quickly incorporated into the stock price. Fama’s findings led to the emergence of index funds, enabling millions of households to invest in the stock market without spending the huge time and effort investors had been spending trying to determine how individuals stocks would fare over days and weeks.
In the 1980s, Shiller showed that although Fama was right, there was more to the story. When Shiller studied stock prices relative to the dividends earned by the stocks over the years, he found a pattern. Although theoretically, stock prices should follow the trend of the dividend stream, year after year, Shiller found that when stocks were priced higher than their dividends proved to justify, they fell in price in the following years in a way that made stock prices predictable over a 3- to 7-year horizon.
In 1982, Hansen developed a statistical method for testing the theory of how the savings and investment decisions of individuals affect stock prices. His work showed, among other things, that it was flawed to view investors as rational actors. In bad times, investors are far less willing to take risk; in good times, they are far more willing. Their pessimism and optimism influences stock prices in ways that earlier models did not account for. Hansen’s work, along with the work of others, laid the foundations of behavioral finance.
Shiller spoke to reporters briefly by phone at the Nobel Committee’s press conference announcing the prize. He expressed gratitude that the field of finance had been recognized. “I believe that finance is a theory that while it has many controversial elements also has a body of knowledge that is useful to society and will improve human welfare,” he said.