Our View

Nobel gives housing-market studies a strong appraisal

By From page A6 | October 18, 2013

The issue: Three top economists’ work recognized

We all know the old joke: If we placed all of the world’s economists end to end, they still wouldn’t agree.

The Nobel Prize Committee has marvelously proved that witticism with this year’s selection of three remarkable Americans for the top prize for economics.

ECONOMIST Robert J. Shiller of Yale University and Eugene F. Fama of the University of Chicago disagree about whether house price fluctuations during the Past decade in the United State constituted an irrational price bubble. They share the prize with another veteran University of Chicago economist, Lars Peter Hansen, who has studied stock-market fluctuations and developed methods to evaluate different theories about price movements.

“Their research has been about how well the financial markets actually work,” explained Professor Per Stromberg, member of the Nobel Economic Sciences Prize Committee. “All of these three researchers are about looking at data and trying to see patterns in financial prices. This is actually a very important test of how well markets work.”

Shiller is probably best known for the widely quoted Standard & Poor’s Case-Shiller Home Price Index, which monitors a 10-city average on home pricing. Shiller wrote in his 2005 book “Irrational Exuberance” that house prices in his index looked like “a rocket taking off” but doubted the trend would continue over the long run.

Shiller, of course, seemed to be spectacularly right. The collapse of housing prices starting in 2008 became one of the major causes of the so-called “Great Recession.”

“I don’t even know what a (price) bubble means,” Fama told The New York Times recently. “These words have become popular. I don’t think they have any meaning.”

ALL THREE MEN have thought long and hard about how efficient, or even rational, capitalism’s marketplace is when setting prices for a share of common stock or that nice, three-bedroom colonial on Maple Street.

Unlike physicists who plumb the natural laws of motion and matter, economists must try to develop statistical models that, ultimately, are based upon human behavior. Hansen, Fama and Shiller have done important and impressive work applying statistical science to the often irrational-seeming process of price setting.

Even if we make jokes about the dismal science of economics, we must acknowledge the impressive achievements they’ve made.

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