Before Eugene Fama set his sights on economics, he was studying romance languages at Tufts University and planned to become a high school teacher. But he found his true calling in his senior year, working for a professor who had him try to devise ways to beat Wall Street.
Fama failed that task, but now, more than 50 year later, that failure has paid off. On Monday, Fama received the Nobel Prize for his work showing the randomness and undpredictability of the stock market.
Fama, 74, who grew up in working-class neighborhoods in Malden and Medford, shared the Nobel with two other American economists:
Robert Shiller, a Yale University economics professor who earned his PhD at the Massachusetts Institute of Technology, and Lars Peter Hansen, a colleague of Fama at the University of Chicago. Fama has spent almost his entire teaching career at the university’s Booth School of Business.
The three men have contributed to the understanding of the movement of asset prices, such as in the stock market, the Nobel committee said.
Fama has become known as the “father of modern finance,” a title the modest Nobel laureate downplayed during a brief phone interview Monday.
“I guess it means I’m old,” he said. “Somehow you just get that name after so long in the game.”
Fama is a grandchild of Sicilian immigrants who ran a grocery store in Boston’s West End. His father drove a lumber truck; his mother was a homemaker. Fama was gifted from the beginning, said his older sister, Maria Musto, getting good grades and excelling in football, baseball, and track at Malden Catholic High School, where he was inducted, in 1992, into the school’s athletic hall of fame.
“He even won honors in spinning tops, that’s what kind of kid he was,” said Musto, who lives in Stoneham.
While he was at Tufts, Fama married his high school sweetheart, Sallyann Dimeco, who went to Girls Catholic High School in Malden. He also worked at a steel factory, while lettering in three sports, returning punts for the football team.
“He was always such a super student, in a class by himself,” said Thomas O’Brien, a Tufts classmate of Fama’s and retired dean of the University of Massachusetts’ Isenberg School of Management.
Fama developed what is known as the efficient market hypothesis, which holds that, in competitive markets, if there is a sign that the value of a stock will rise, traders will raise the price until it reflects that information. This helped spur the creation of index funds, a type of mutual fund with a portfolio that matches the makeup of a market index.
That’s how Fama invests, he said, because it’s impossible for any investor, even a professional, to anticipate the ups and downs of the market.
Fama’s basic advice for investors, said John Cochrane, a fellow Booth professor who is married to Fama's youngest daughter, Elizabeth: “Hold an index fund. Don’t try to outsmart the other guy because he’s probably going to outsmart you.”
He added: “People say, ‘Oh, the financial crisis proves markets aren’t efficient.’ That’s ridiculous. Markets are supposed to be efficient, not clairvoyant.”
Fama has not forgotten about his Boston-area roots and has established a diversity scholarship fund to help several students attend Malden Catholic every year. The annual gift is “pretty significant,” said headmaster Ed Tyrrell, noting that while the school includes Senator Edward Markey among its alumni, Fama is the school’s first Nobel recipient.
“He is a son of Malden Catholic,” Tyrrell said. “I don’t think too many people can hang that shingle out.”
Asked if he planned to use Fama’s Nobel in the school’s marketing efforts, Tyrrell said: “It’s already on the website.”
Fama and his fellow Nobel laureates are an interesting selection by the Nobel committee, said Robert Solow, who was given the Nobel economics prize in 1987 and is professor emeritus at MIT, because they contributed to the modern theory of finance on both ends of the spectrum.
Fama studied the unpredictability of stock prices over a few days or weeks, while Shiller found that it’s possible to foresee the course of these prices over a period of a few years. Hansen devised statistical methods that help explain asset prices.
Shiller is a critic of Fama’s efficient-markets theory. Markets are inefficient in some major ways as revealed by the financial crisis, said Shiller, who is known for warning about the dot-com bubble of the late 1990s and the recent housing bubble.
Along with Karl Case, a Wellesley College professor emeritus, Shiller developed the S&P/Case-Shiller Home Price Indices, perhaps the most widely respected measure of the housing market.
Shiller earned his PhD from the Massachusetts Institute of Technology in 1972; his research cited by the Nobel committee on exploring how stock prices are related to anticipated dividends was an extension of his PhD dissertation on interest rates, said James Poterba, an economics professor at MIT and president of the National Bureau of Economic Research, a Cambridge nonprofit.
Poterba noted that Shiller had the right pedigree for a Nobel. His primary thesis adviser was the late Franco Modigliani, who was honored with the Nobel Prize in Economics in 1985.
The other members of his dissertation committee include two other Nobel laureates, the late Paul Samuelson, who won the prize in 1970, and Robert Merton, a professor at the MIT Sloan School of Management who shared the 1997 Nobel.
Shiller has other local ties, too. His wife’s family is from Waltham, and his son, Benjamin, is an economics professor at Brandeis University.
Finance is the structure of our economy, Shiller said, and financial markets are of great importance in today’s world.
“They are the source of our economic miracle that’s going on around the world,” he said.
“I think the experience of China and India and other suddenly emerging countries has a lot to do with their applying modern business methods, and prominent among them are financial methods.”