The Nobel Memorial Prize in Economic Science has sometimes been awarded to economists who disagree profoundly. Notably, in 1974, the Nobel committee gave a joint prize to Gunnar Myrdal, a Social Democrat in Sweden and a proponent of the welfare state, and Friedrich Hayek, a conservative who believed that government should be minimal.

This time, the prize given to Eugene Fama and Lars Peter Hansen of the University of Chicago and me for “empirical analysis of asset prices” is similarly discordant. So many people have been asking me about this obvious incongruity that I thought I should address it directly here.

Professor Fama is the father of the modern efficient-markets theory, which says financial prices efficiently incorporate all available information and are in that sense perfect. In contrast, I have argued that the theory makes little sense, except in fairly trivial ways. Of course, prices reflect available information. But they are far from perfect. Along with like-minded colleagues and former students, I emphasize the enormous role played in markets by human error, as documented in a now-established literature called behavioral finance.

The conflict between the third winner, Professor Hansen, and me is less marked. In fact, he is well known for having rejected one form of the efficient-markets model, in a famous paper with Kenneth Singleton, now at Stanford. Professor Hansen has developed a procedure, called the “generalized method of moments,” for testing rational-expectations models — models that encompass the efficient-markets model — and his method has led to the statistical rejection of many more of them. His sympathies still seem to be with rational expectations and efficient markets, though.