14 Responses to “They Got It Right”

1. 1 1 Patrick R. Sullivan
   October 14, 2013 at 2:51 pm

   Good interview of Shiller from 2012;

2. 2 2 prior probability
   October 14, 2013 at 6:06 pm

   Interestingly, the NY Times report on this year’s Econ Nobel harps on the differences between Schiller and Fama (see http://www.nytimes.com/2013/10/15/business/3-american-professors-awarded-nobel-in-economic-sciences.html?_r=0) … So, was the Nobel Committee hedging, so to speak, by awarding the prize to both scholars?

3. 3 3 Advo
   October 15, 2013 at 12:59 am

   I always thought that the EMT is obviously at odds with the facts.
   Now it’s been toned down to the point where “the markets are efficient and rational on average, in the long term” which is about as useful as saying “on average, the Rocky Mountains are flat”.

4. 4 4 Harold
   October 15, 2013 at 4:59 am

   I will have to read up on this more. The coverage we got here said they showed that short term fluctuations were very difficult to predict, but longer term predictions were possible – rather like weather and climate. I am not sure whether these predictions are absolute or with reference to some other underyling value. I can see that long term the value of the stock in a company will trend towards the actual value of the company, but that is very different from saying that I can predict what the actual value of a company will be in 3 years.

5. 5 5 Advo
   October 15, 2013 at 7:24 am

   @Harold, there’s also the problem that a higher or lower stock price in turn has an actual impact on how the company performs in the real world (easier access to capital is perhaps the biggest advantage of a high stock price).

6. 6 6 Dave
   October 15, 2013 at 9:11 am

   The EMT at its finest:

   http://blogs.marketwatch.com/thetell/2013/10/04/twtrq-stock-up-as-much-as-1800-as-investors-confuse-tweeter-for-twitter/

7. 7 7 Harold
   October 16, 2013 at 5:31 am

   Looking up Shillers work on house prices, he managed to reconstruct the prices of a particular group of Dutch houses and discovered that they followed a series of “bubbles” and crashes. I was particularly struck by the line “But they came crashing down in the 1670’s, when the prime minister was killed, and partially eaten, by a mob of angry Dutch”. Dangerous job, Prime Minister.

   The thing that seems to stand out about Fama in his earlier work on EMT is that he made predictions that he tested empirically. This seems to be good evidence that he was on the right track. One article said that Fama and Schiller were on opposite sides of the debate about rationality of the market. However, does Fama necessarily say the market is rational? It seems it is only information that is described in EMT, not how people react to it. So a question, is an “efficient” market in this context necessarily a rational market?

8. 8 8 Harold
   October 16, 2013 at 5:53 am

   Sorry- another observation on the same theme.
   Looking at an interview with Fama. he says the following:

   Interviewer: So what caused the recession if it wasn’t the financial crisis?

   Fama: (Laughs) That’s where economics has always broken down. We don’t know what causes recessions.

   …
   Interviewer: But what is driving that volatility?

   Fama: (Laughs) Again, its economic activity—the part we don’t understand.

   Is this “part we don’t understand” consistent with Shillers psychological approach? Schiller says it is irrational exuberance (?), Fama says he doesn’t know. Is Shiller filling in the gap in Fama’s theory.

9. 9 9 Harold
   October 16, 2013 at 6:10 am

   Fama’s last comment in the interview: “(Laughs) My attitude is this: if you are getting attacked by Krugman, you must be doing something right.”
   http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html

10. 10 10 Ricardo Cruz
    October 17, 2013 at 8:01 am

    Hey guys, everybody here is commenting about the “EMT” … what does that stand for?

11. 11 11 Pat
    October 17, 2013 at 10:31 am

    Prior probability, please read John Cochrane on the common thread between Fama and Shiller. http://johnhcochrane.blogspot.com/2013/10/bob-shillers-nobel.html They disagree on why risk premiums change over time but they both proved that risk premiums do change over time.

12. 12 12 Wonks Anonymous
    October 17, 2013 at 4:39 pm

    Fama notes in that New Yorker interviewer that he doesn’t do macroeconomics. Yup.

13. 13 13 Henri Hein
    October 18, 2013 at 2:58 pm

    Harold @7:

    Right on. I stumble across that as well. Seems to me 2 different questions.

14. 14 14 Henri Hein
    October 18, 2013 at 3:05 pm

    Ricardo:

    Efficient Market Hypothesis.