Economist Eugene Fama, MBA’64, PhD’64, is widely recognized as “the father of modern finance.” The 2013 Nobel laureate and Robert R. McCormick Distinguished Service Professor of Finance’s best-known contribution is the efficient market hypothesis: the idea that stock price movements are impossible to predict in the short term and that new information affects prices almost immediately. Therefore, if the stock market is efficient, there is no way to consistently beat it.
Fama’s work on efficient markets, which began with his doctoral thesis, transformed the way we understand and practice investing. Of particular note, his research contributed to the development of index funds. “Efficient market types (like me) judge that predictable variation in expected returns on stocks and bonds is rational,” Fama said in his Nobel acceptance speech, “the result of variation in risk or willingness to bear risk.”
More recently, Fama has looked at “bubbles,” periods of a strong stock price increase followed by a strong decline. In his research, Fama found no evidence that market declines are ever predictable—and so concluded that bubbles, with all the economic damage that can result, cannot be prevented through policy. The author of two books and more than 100 articles, Fama is among the most cited researchers in economics. He was the first recipient of three major prizes in finance: the Deutsche Bank Prize in Financial Economics (2005), the Morgan Stanley American Finance Association Award for Excellence in Finance (2007), and the Onassis Prize in finance (2009). Fama shared the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel with Chicago Booth’s Lars Peter Hansen and Robert J. Schiller of Yale, “for their empirical analysis of asset prices.”