Eugene Fama is a renowned American Economist who hailing from Boston, Massachusetts. He is the esteemed recipient of the 2013 Nobel Prize in Economic Sciences, an honor he shared with his fellow colleagues Lars P. Hensen and Robert J. Shiller for their distinguished insight on efficient markets and the price determination of assets.
Fama from his early years displayed that he’s a man of many talents when he was selected as the best student athlete of his university, namely Tufts University. It was from here that he graduated in 1960 with a degree in Romance languages. His learning exploits continued at the Booth School of Business in the University of Chicago where he completed his Masters and doctorate studies in finance and economics. He subsequently assumed the role of a professor at the University of Chicago, where he went on to earn the title of Robert R. McCormick Distinguished Service Professor of Finance in 1993.
Eugene Fama has dedicated years of his professional life to studying the movements of asset prices. Fama claimed that the practice of forecasting stock prices in the short run is an extremely problematic process, since markets are very susceptible frequent inflows of new information to which the prices of different assets react differently. He further asserted, based on the analysis of historical data, that stock prices follow a ‘random walk’ whereby their average prices and expected deviations from those prices are arbitrary and can assume a multitude of states over time. He thus felt that, at least in the short run, investors would not find past trends any useful due to the unpredictable nature of the stock market and would thus be better off by putting their money in portfolios comprising of a number of diverse assets to hedge risk. This theory was coined the term ‘efficient market hypothesis’, and has continued to be employed today by experts in the field of financial economics to understand the workings of the stock market.
Fama’s groundbreaking research prompted others in his field to investigate this phenomenon as well, stimulating a great deal of research in financial economics. A by-product of these inquiries was the creation of stock indexes which presented a statistical collection of relevant stocks that allowed investors to curtail risk.
Eugene Fama also holds impressive credentials in the realm of written publications as well. He has to date authored two books, and written over a hundred articles, the underlying theme of most of which is the association between risk and return and the dynamics of portfolio management. Fama’s research papers have received widespread critical acclaim. “The Cross-Section of Expected Stock Returns” received the Smith Breeden Prize in 1992 for being the best paper in the Journal of Finance. His other paper, “Market Efficiency, Long-Term Returns, and Behavioral Finance“, also received similar recognition, winning 1998 Fama-DFA Prize for the best paper published in the Journal of Financial Economics. Besides being a prolific writer, Fama has the role of an advisory editor as well, serving the Journal of Financial Economics.
Fama’s appointment in 2001 to the American Finance Association as its first fellow is one of the many testaments of his greatness. He also received fellowship of the Econometric Society and the American Academy of Arts and Sciences. Fama’s other awards and accomplishments include winning the Deutsche Bank Prize in Financial Economics, the Morgan Stanley American Finance Association Award for Excellence in Finance and the Onassis Prize in Finance in the years 2005, 2007 and 2009 respectively. For these and many other reasons, he is typically addressed as the “father of modern finance”, and his contributions to the efficient market hypothesis were a catalyst to eventually land him the Nobel Prize in 2013.
Books by Eugene Fama
