If Fama were Newton, would Shiller be Einstein?

I Follow Noahpinion blog by  prof Noah Smith, he recently made a remarkable article by comparing Fama were Newton, would Shiller be GoogleEinstein? OK OK, another quick break from my blogging break. An Econ Nobel for behavioral finance is just too juicy to resist commenting on.

Before the prize was announced, Prof  said that it would be funny if Fama and Shiller shared the prize. But he also think it’s perfectly appropriate and right that they did. Many people have called this prize self-contradictory, but I don’t think that’s the case at all. If Newton and Einstein had lived at the same time, and received prizes in the same year, would people say that was a contradiction? I hope not! And although it’s probably true that no economist is on the same intellectual plane as those legendary physicists, Fama’s Efficient Markets Hypothesis (which was actually conceived earlier, in different forms, by Bachelier and Samuelson and probably others) seems to me to be the closest thing finance has to Newton’s laws, and behavioral finance – of which Shiller is one of the main inventors – seems like an update to the basic EMH theory, sort of like relativity and quantum mechanics were updates to Newton. Continue reading “If Fama were Newton, would Shiller be Einstein?”

Cost Matter in all forms of Efficient Markets

John C. Bogle the renowned name in the mutual funds shared some thoughts long back saying Whatever the form of theA EMH, I know of no serious academic, professional money manager, trained security analyst, or intelligent individual investor who would disagree with the thrust of EMH: The stock market itself is a demanding taskmaster. It sets a high hurdle that few investors can leap.

University of Chicago Professor Eugene F. Fama had performed enough analysis of the ever-increasing volume of stock price data to validate this “random walk” hypothesis, rechristened as the efficient market hypothesis (EMH). Today, the intellectual arguments against the EMH religion are few. The church, however, has three different dogmas. Princeton Professor Burton Malkiel describes them: the weak form (stock price changes over time are statistically independent); the semi-strong form (prices quickly reflect new value-changing information); and the strong form (professional managers are unable to accurately forecast the future prices of individual stocks). Continue reading “Cost Matter in all forms of Efficient Markets”

Why the Efficient Markets Hypothesis is Fatally Flawed, But Why The Idea Underneath It Is Kinda Useful But Not Entirely Watertight.

The “Efficient Markets Hypothesis” is a popular target of anger and derision among lay critics of the econ profession.images
How can financial markets be “efficient” when they just crashed and took our economy down with them? And when sensible people like Bob Shiller, Nouriel Roubini, Bill McBride, et al. were screaming their heads off about a housing bubble years before the pop?

Of course I have some sympathy for these complaints. But the more I learn about and teach finance, the more I learn what an important and useful idea the “EMH” in fact is. I don’t want to say that the EMH is unfairly maligned, but I do think that its vast usefulness is usually ignored in the press.
First of all, people should realize that the EMH is misnamed—it’s not really a hypothesis, it’s not about “efficiency” in the economic sense of the word, Continue reading “Why the Efficient Markets Hypothesis is Fatally Flawed, But Why The Idea Underneath It Is Kinda Useful But Not Entirely Watertight.”