Efficient market theory guru Fama tipped for Nobel

STOCKHOLM (Reuters) - American economist Eugene Fama, considered the father of the efficient market theory, is the favorite to win this year's Nobel economics prize, due to be announced on Monday.

In the simplest terms, the theory holds that markets are the best guide to determining the value of an asset.

After a year of extreme financial turmoil, questions have been raised about how rational market behavior really is. But being in tune with current events has never been a condition for winning the prestigious prize, which often rewards work that took place decades ago.

Fama, a University of Chicago professor and heavyweight within corporate finance research, is quoted at 2/1 by British bookmaker Ladbrokes for the prize.

"He has made many innovative contributions. But he is also a bit controversial these days," said Professor Hubert Fromlet of the Jonkoping International Business School, who is known in Sweden for his annual prize predictions.

Fromlet said the efficient market theory assumes human beings are basically rational. "And that definitely hasn't chimed with the reality of the financial crisis," he said.

The 10 million crown ($1.4 million) award, first given in 1969, was added as a special Nobel category to go with prizes in the sciences and for peace that have been handed out since 1901.

Second favorite according to Ladbrokes is economic growth theorist Paul Romer of Stanford University. Kenneth French of U.S. Dartmouth College, a finance specialist, and Yale University's William Nordhaus, who has been a leader in the area of climate economics, are also seen as top contenders.

Fromlet said he thought this year's prize could well reward organization and incitement theory, a topical area given the current uproar over bankers' bonuses. Another possible winning subject, he said, was growth theory.

An analysis by Thomson Reuters points to Ernst Fehr of the University of Zurich and Matthew Rabin of the University of Berkeley as potential winners for advances in behavioral economics.

The Thomson Reuters analysis makes use of the way scientists credit one another for their work to find out who has done the most influential research.

Some Nobel watchers last year had thought it was time for an economist or a team specializing in finance to get the prize.

Instead it went to Princeton University professor and New York Times columnist Paul Krugman for work that helps to explain why some countries dominate international trade.

Krugman himself does not expect this year's award to be trade-related. "There are still more trade prizes to give although I think they won't do another one this year," he told a recent conference in Helsinki.

The economics prize is the last of this year's Nobel prizes to be announced, following announcements for those in peace, literature and several branches of science.

Alfred Nobel, who made a fortune from his invention of dynamite, laid the foundations for awards in his will in 1895. The prize in economics was established later by the Swedish central bank in memory of Nobel.

The Nobel prize ceremonies take place in December in Stockholm.

($1=6.967 Swedish Crown)

(Reporting by Anna Ringstrom, additional reporting by Brett Young in Helsinki; editing by David Stamp)