Eugene Fama, Nobel Prize Laureate

Fama has been long-deserving for some time now.  He won basically for his empirical work on asset prices.

Here is Fama on Wikipedia.  Here is Fama on

Fama teaches at the Booth School of Business at the University of Chicago and he is very much in the classic mold of a Chicago School economist.  I feared that with the financial crisis Fama would be too unpopular a pick, because many people misinterpret “efficient markets theory,” so this was a prize which valued the economic impact of the research over the trendiness.  That said, giving the prize to Shiller as well is a nod in the direction of behavioral finance and inefficient markets theory, so the committee covered all the bases.

Fama’s first key piece dates from 1965, and then through the 1970s he laid down the foundations for tests of efficient markets theory.  The bottom line to these early tests is that publicly available information does not predict excess returns.  That does not mean market prices have to reflect fundamental values of stocks (though Fama sometimes flirts with that claim too), but it does suggest that stock-picking, in the absence of information, will not on average outperform diversification plus random stock purchases.  The variables which earlier theorists thought might predict excess returns turn out not to.  Here is a good survey article, with Burt Malkiel, on where the efficient markets hypothesis stood circa 1970.

The remarkable thing about Fama — and a point which critics often neglect — is that Fama, working with Ken French, also has provided some of the best evidence against the efficient markets hypothesis.  See for instance this 1992 piece.  And see this piece too, with French from 1993.  Contrary to the earlier Fama work, it turns out there are some empirical predictors of excess returns, if you look hard enough for them.  The most notable of these are firm size and book to market value.  To put that more concretely, small firms, when they sink in market valuation relative to their book values, appear to yield excess returns in the future periods.  In this regard Fama’s later work is closely in tune with some of the later research by Robert Shiller.  One possible way of reading this empirical result (which I believe by the way Fama has never endorsed) is that the share prices of small firms show some mean-reversion upwards after they are hit by bad news; that could result for instance from imperfect liquidity in those share markets, combined with some measure of contagious investor sentiment.

The 1992 and 1993 pieces with French are landmarks in empirical finance and they set off a much longer literature trying to find predictors of excess returns on stocks.  Note that Fama holds open the possibility that real rates of return are changing in the economy, or risk premia are changing, and thus he does not automatically identify these empirical results with market inefficiency, as he had defined that concept in his articles from the 1960s.

Perhaps surprisingly, many of Fama’s best cited pieces are on organizations, control, and property rights, in the vein of Ronald Coase.  These pieces are not what won him the prize, but he provided an early and very insightful typology and analysis of different organizational forms, such as limited liability, non-profits, publicly vs. privately-held firms, and so on.  With Jensen he wrote a seminal piece on the separation of ownership and control, and why transactions costs might give rise to such organizational forms.  I am a big fan of his 1980 piece “Agency Problems and the Theory of the Firm.”  One contribution of this article is to show how the market for managers can boost firm efficiency, even when takeovers and other ways of disciplining managers are working imperfectly.  Also see his “Agency Problems and Residual Claims,” again with Jensen.  Fama’s work on organizational forms tends to suggest that observed market structures work relatively well, for reasons related to the work of Ronald Coase and transactions costs.

Fama has many other contributions.  He wrote an insightful piece asking what is special about banks.  It could be that deposit-taking banks have special information about the businesses they are dealing with.  This was a very important piece about inflation and stock returns.  Finally, one of Fama’s 1980 papers suggested that control of currency would suffice to pin down the price level and also control aggregate demand.  This piece continues to exert a strong influence on our own Scott Sumner, who argues that currency will suffice to achieve a nominal gdp target, even when credit markets are not operating very well (I don’t agree with that claim, by the way).

It is remarkable how many top flight, empirically important, and conceptually sharp pieces Fama contributed from 1965 through the mid 1990s, pretty much a thirty year period.  And after that he hardly fell apart in terms of research.  This is a very well deserved Nobel Prize.

Here is a fun New Yorker interview with Fama.  Here is Fama’s home page.  He is also an avid golfer.


"misinterpret" is an understatement. You have Proggers claiming EMH is bunk and then hours later claiming the expected value of future inflation is the spread between TIPS and nominal Treasuries.

1) >> some of the best evidence against the efficient markets hypothesis>>

Fama says that small and value proxy for risk factors, so that higher expected returns are a reward for higher risk. This is consistent with EMH.

2) “misinterpret” is an understatement. You have wing nuts claiming the market is always right and then hours later claiming the low treasury yields and low inflation are mistakes and that we can't rely on market pricing for guidance.

foosion is right... I think Fama and French would say that low book to value /small cap stocks are riskier... And, consequentially, the ECMH holds. Fama would probably take exception to to calling it "the best evidence against the efficient markets hypothesis."

I know a lot of people are critical of ECMH. But is unbelievably useful and generally a very reliable framework for thinking about asset prices. What's our best evidence? How about the miserable failure of mutual fund managers to reliably beat the market.

Incidentally, I always get a chuckle when skeptics of the ECMH recommend investing in low-cost, index mutual funds. And it happens frequently...

The Three Factor Model he developed with Ken French is a risk/return model. On Econtalk, Fama says this:

"A risk-return model is untestable without market efficiency. Most risk-return models assume that markets are efficient. With very few exceptions."

"You have wing nuts claiming the market is always right and then hours later claiming the low treasury yields and low inflation are mistakes and that we can’t rely on market pricing for guidance."

Wait a minute, aren't the wing nuts are saying treasury yields and inflation are rigged (by the so called "central bank" or FED) and that we can't rely on market rigging for guidance?


The comment board is now open to ankle-biters.

The three factor model overturned (or enhanced) CAPM, not EMH....right?

The EMT and CAPM aren't the same thing. Fama French 3 factor model differs from the latter, not the former.

Correct. CAPM and the FAMA/FRENCH 3 factor model are risk-return models, and both assume market efficiency. Tyler implied that the FAMA/FRENCH model was evidence against EMH, but I don't think that's right.

Here is a fun New Yorker interview with Fama.

Fun? Fama exposes himself as an idiot in that interview.

You have no sense of humour. It's a masterpiece, and an education too. And he's so humble, for a future Nobel prize winner.

Whereas you expose yourself as an idiot every second of every day.

Yeah, let's belittle the Nobel Prize in Economics winners, showing what losers we are? Fama? Gimme a break. He simply sold EMH to an unsuspecting public, then found a formula that works with back-tested data "Fama–French three-factor model" to 'predict' (historically, not forwardly) stock price movements. Here is a man that does not believe bubbles can exist, yet he shares the Nobel with the popular book writer and trite theorist Robert J. Shiller? Not to be confused with Eric Schiller (, except for those who read chess books.

As a former Fama student, I believe that Fama would beg to differ that his '92 Cross Sections and '93 Common Factors are the best evidence against the efficient markets hypothesis.
I believe he would say that size and value are risk factors for the marginal investor.

What about Ken French?

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So basically Fama gets a Nobel for stating the obvious - the average return to investors is the market return. A Nobel for asset pricing should go to guys like Warren Buffett and Edward Thorp, guys who actually made 100's or 1000's of millions from their asset pricing theories, not some academic who rationalises their own inability to beat the market.

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