Eugene Fama facts for kids
Quick facts for kids
Eugene Fama
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Fama in 2013
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| Born | February 14, 1939 Boston, Massachusetts, U.S.
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| Institution | University of Chicago |
| Field | Financial economics, Organizational economics, Macroeconomics |
| School or tradition |
Chicago School of Economics |
| Alma mater | Tufts University (BA) University of Chicago (MBA, PhD) |
| Doctoral advisor |
Merton Miller Harry V. Roberts |
| Doctoral students |
Cliff Asness, Myron Scholes, Mark Carhart |
| Contributions | Fama–French three-factor model Efficient-market hypothesis |
| Awards | 2005 Deutsche Bank Prize in Financial Economics 2008 Morgan Stanley-American Finance Association Award Nobel Memorial Prize in Economics (2013) |
| Information at IDEAS / RePEc | |
Eugene Francis "Gene" Fama (born February 14, 1939) is an American economist. An economist is a person who studies how people and societies make choices about money, resources, and goods. Fama is famous for his work on how stock prices behave and how financial markets work.
He is a professor of finance at the University of Chicago Booth School of Business. In 2013, he won the Nobel Memorial Prize in Economic Sciences. He shared this important award with Robert J. Shiller and Lars Peter Hansen. Many people call him "the father of modern finance" because his ideas helped build the foundation for how we understand money and investments today.
Contents
Early Life and Education
Eugene Fama was born in Boston, Massachusetts. His family came from Italy. He went to Tufts University and earned a degree in Romance Languages in 1960. He was also a top student-athlete there.
University Studies
Fama continued his studies at the University of Chicago Booth School of Business. He earned both his MBA and PhD degrees in economics and finance. His main teachers were Merton Miller, who also won a Nobel Prize, and Harry V. Roberts.
Important Research and Career
Eugene Fama has spent his entire teaching career at the University of Chicago. He has done a lot of research that changed how people think about stock markets and investing.
Understanding Stock Prices
Fama's PhD paper, written in 1964, looked at how stock prices change each day. He found that short-term stock price movements are very hard to predict. They often seem to move randomly, like a "random walk" where the next step is not connected to the last. This idea was published in a business journal in 1965.
Later, Fama worked with another economist, Kenneth French. They showed that sometimes, you can explain why stock returns might be higher or lower at certain times. For example, during tough economic times, people might be more careful with their money. This can make stock prices lower and average returns higher.
Fama also helped create a way to study how stock prices react to new information. This is called an "event study". For example, if a company announces something big, how quickly do its stock prices change? His work in 1969 was one of the first to use this method.
Efficient Market Hypothesis
Eugene Fama is often called the "father" of the efficient-market hypothesis. This idea suggests that financial markets are "efficient." This means that all available information is already reflected in stock prices. So, it's very hard to consistently "beat" the market by finding undervalued stocks.
Fama described three levels of market efficiency:
- Weak-form efficiency: This means you can't predict future stock prices by looking at past prices or patterns. All past price information is already in the current price.
- Semi-strong form efficiency: This means that all publicly available information (like company news or earnings reports) is already reflected in stock prices. So, you can't make extra profits by using public information.
- Strong-form efficiency: This is the strongest idea. It means that even private or "inside" information is already reflected in prices. This would mean that even insider trading wouldn't lead to extra profits, which is a very high bar.
Fama also pointed out something important called the "joint hypothesis problem". This means that when you test if a market is efficient, you are also testing your model of how prices should work. If your test shows something unexpected, you can't be sure if the market is truly inefficient or if your model for predicting prices is simply not perfect.
Fama–French Three-Factor Model
In recent years, Fama has written many important papers with Kenneth French. They challenged an older model called the Capital Asset Pricing Model (CAPM). The CAPM suggested that a stock's "beta" (how much it moves with the overall market) was the main thing explaining its average return.
Fama and French found that two other things also help explain why some stocks have higher average returns than others:
- Company size: Smaller companies (measured by their market value) often have higher average returns.
- Value: Companies that are considered "value" stocks (meaning their stock price is low compared to their assets) also tend to have higher average returns.
Their "Fama–French three-factor model" became a very important tool for understanding and evaluating investment portfolios. It uses the market's return, a value factor, and a size factor to explain how different investments perform. In 2015, they added two more factors to their model: how profitable a company is and how much it invests. This created a five-factor model.
Views on Economic Bubbles
Eugene Fama has also shared his thoughts on "economic bubbles." A bubble happens when the price of something, like stocks or houses, goes up very quickly and much higher than its real value, often followed by a sudden drop. Fama is careful about saying something is a bubble. He believes it's hard to know something is a bubble until after it bursts. He argues that it's difficult to predict a bubble in real time.
He has also expressed doubts about bitcoin's long-term stability. He points to its very big price changes and says it doesn't have a clear "intrinsic value" like a company or a physical asset.
See also
In Spanish: Eugene Fama para niños
