At first, the idea that the Nobel economics prize should be shared by Eugene Fama and Robert Shiller sounds absurd – akin to making Keynes and Friedman share the award.
After all, the former, of the University of Chicago, is the father of the efficient markets hypothesis, while Mr Shiller of Yale University is its best-known critic. Yet it was announced yesterday that they would share this year’s award, along with Lars Peter Hansen, a fellow Chicago academic honoured for his work in dynamic modelling.
The efficient markets hypothesis gave rise to many modern financial instruments, including the index fund, but it is easy to ridicule. In its extreme form, it implies the price is always right – in other words, that the market price always incorporates all known information. The bubbles and crashes of the past two decades appear incompatible with this.