Economists win Nobel for research on financial markets

Ordinary investors don't stand much chance of beating the market. It moves way too fast and efficiently. Or it behaves in ways that make no sense at all.

Three Americans won the Nobel prize in economics Monday for their sometimes-contradictory insights into the complexities of investing.

Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University were honored for shedding light on the forces that move stock, bond and home prices - findings that have transformed how people invest.

Fama's research revealed the efficiency of financial markets: They absorb information so fast that individual investors can't outperform the markets as a whole. His work helped popularize index funds, which reflect an entire market of assets, such as the Standard & Poor's 500 stock index.

"Fama's work was incredibly fundamental in the '60s and '70s," said David Warsh, who follows economists at his Economic Principals blog. "It led to enormous practical change in terms of people not buying particular stocks but buying index funds."

Shiller's research examined asset prices from a contrasting angle. He showed that in the long run, stock and bond markets can behave irrationally, reaching prices that are out of whack with economic fundamentals.

Shiller, 67, predicted the dot-com crash of the early 2000s and the implosion of home prices in 2007. He has also been a pioneer in the field of behavioral economics, or how human emotions, biases and preferences can collectively influence financial markets.

Using mathematical tools like the well-known Case-Shiller index of home prices, Shiller has expanded the available information on asset prices.

Meb Faber, chief investment officer at Cambria Investment Management, said his firm uses a model developed by Shiller to seek stock bargains around the world.

Hansen has focused on statistical models, creating ways to test competing theories of why asset prices move as they do.

Fama and Shiller "provide the ends of the spectrum" between those who believe financial markets are efficient and those who think them deeply flawed, with Hansen "in the middle doing the math," said Allen Sanderson, a University of Chicago lecturer in economics.

The three economists share the $1.2 million prize, the last of this year's Nobels to be announced.