The History of Finance in Four Minutes

Wednesday, December 11, 2013 6,343 views

Anyone who has paid attention to us at IFA is fully aware of how excited we are about Eugene Fama being awarded the 2013 Nobel Prize in Economic Sciences.  Yesterday, the event reached its culmination in the award ceremony followed by the Nobel Banquet attended by the Swedish Royal Family. For all you foodies out there, here is a link to the menu, and below is a photo of the dessert, complete with a chocolate silhouette of Alfred Nobel himself.


Of course, the part of the ceremony/banquet that was of import to us was Fama’s 4-minute acceptance speech (see above).

Fama began with an acknowledgement of how much he has learned from his fellow laureates, Lars Peter Hansen and Robert Shiller. From there he recounted how the field of finance was just getting started when he began his work at the University of Chicago half a century ago:

“We had Harry Markowitz’s magnificent Chicago PhD thesis on portfolio theory, and we had the theorems of Merton Miller and Franco Modigliani on the irrelevance of the financing decisions of firms. Spurred by the coming of computers, empirical research in what became the theory of efficient markets was getting underway. That was it in terms of major paradigms.”

Fama went on to describe “an explosion” of research over the next two decades, beginning with William Sharpe’s Capital Asset Pricing Model and ending with the equations of option pricing theory developed by Fischer Black, Myron Scholes, and Robert Merton. Fama counted himself along with Lars Peter Hansen and Robert Hansen as the “empiricists” who put the major theoretical paradigms through the empirical wringer. In other words, while an equation or mathematical model may elegantly describe a financial relationship, it is only as good as the data that bears it out.

During Fama’s storied career, finance went from being a backwater of economics to playing a central role not just in academia but in the real world where trillions of dollars are managed in accordance with the findings of modern finance. Although he is too humble to say it, Fama has played and continues to play a major role in this incredible growth. As we close out our coverage of this long awaited event, we once again say, “Congratulations, Gene!” We can’t wait to see what the next fifty years bring.

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