Eugene Fama vs. Robert Shiller
Compare and Contrast Eugene Fama and Robert Shiller
The Nobel Prize is a set of annual international awards presented in recognition of cultural and scientific advances, in the categories of Physics, Chemistry, Literature, Peach, Physiology or Medicine and Economic Sciences (Nobel Media AB, 2013). In 2013, Robert Shiller, Eugene Fama and Lars Peter Hansen were awarded the Nobel Prize for their outstanding contributions in Economics research and their work on explaining asset prices and how financial markets function (Howden, 2013, p. 2). This essay analyses the work of Eugene Fama and Robert Shiller, while comparing and contrasting their work on financial markets.
Despite the fact that both Eugene Fama and Robert Shiller both won the Nobel Prize in 2013 in the same field, their results and conclusions could not be more different. Fama, taking a neoclassical approach to the issue, believes the idea that financial events can be explained as though most people are fully rational (Howden, 2009, p. 8). In contrast, Shiller uses a methodology that believes financial events should be clarified by recognising people often behave irrationally due to psychological imperfections.
The Efficient Market Hypothesis (EMH), developed by Fama in the early 1960’s, emphasises that all financial markets incorporate and reflect all relevant price information, and as a consequence, it is impossible to consistently achieve abnormal returns. The EMH does not necessarily assume that all investors are rational, but it does assume that all markets are rational (Ritter, 2003, p. 430). According to the EMH, financial instruments will always trade at a fair value, proving it impossible (absent of illegal insider information) for investors to purchase undervalued stocks or sell stocks for exaggerated prices (Howden, 2009, p. 9). Therefore, it is impossible to “beat” the market, because all market returns are unpredictable. This unpredictability was explained by Fama and other economists
The Nobel Prize is a set of annual international awards presented in recognition of cultural and scientific advances, in the categories of Physics, Chemistry, Literature, Peach, Physiology or Medicine and Economic Sciences (Nobel Media AB, 2013). In 2013, Robert Shiller, Eugene Fama and Lars Peter Hansen were awarded the Nobel Prize for their outstanding contributions in Economics research and their work on explaining asset prices and how financial markets function (Howden, 2013, p. 2). This essay analyses the work of Eugene Fama and Robert Shiller, while comparing and contrasting their work on financial markets.
Despite the fact that both Eugene Fama and Robert Shiller both won the Nobel Prize in 2013 in the same field, their results and conclusions could not be more different. Fama, taking a neoclassical approach to the issue, believes the idea that financial events can be explained as though most people are fully rational (Howden, 2009, p. 8). In contrast, Shiller uses a methodology that believes financial events should be clarified by recognising people often behave irrationally due to psychological imperfections.
The Efficient Market Hypothesis (EMH), developed by Fama in the early 1960’s, emphasises that all financial markets incorporate and reflect all relevant price information, and as a consequence, it is impossible to consistently achieve abnormal returns. The EMH does not necessarily assume that all investors are rational, but it does assume that all markets are rational (Ritter, 2003, p. 430). According to the EMH, financial instruments will always trade at a fair value, proving it impossible (absent of illegal insider information) for investors to purchase undervalued stocks or sell stocks for exaggerated prices (Howden, 2009, p. 9). Therefore, it is impossible to “beat” the market, because all market returns are unpredictable. This unpredictability was explained by Fama and other economists