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Tension

I'm trying to reconcile these statements, one about and one by U of Chicago's recent Nobel prize winner.

First, from the Chicago Tribune:

Fama is an inveterate researcher who is known for constantly testing the same theory he developed in the 1960s.  "Rather than being a proponent of the efficient market theory, he was and is far more interested in testing that idea," said Alexi Savov, an assistant professor of finance at New York University's Stern School of Business, who studied under both Fama and Hansen at U. of C. "He's a data-driven person who really wants to know the way things really are, versus a proponent. He's much more interested in the data than the theory."

And, from the New York Times:

Five years [after Schiller predicted a housing crash], with home prices well on the way to fulfilling Mr. Shiller’s prediction, the economist Eugene F. Fama said he still did not believe there had been a bubble.  “I don’t even know what a bubble means,” said Mr. Fama, the author of the theory that asset prices perfectly reflect all available information. “These words have become popular. I don’t think they have any meaning.”

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Yes, the whole things is puzzling.  It seems that Fama doesn't really believe in his own eficient market theory, that he constantly tries to disprove it, but he also says that in 2008 there was no bubble in the first place.  Is that how he disproves his theory -- denies the catastophic data of a Great Recession when the market obviously did not correct itself?  And Schiller got the prize for contradicting him by predicting the bubble.  Well, that makes sense.

Weird.  Truly weird.

Everyday something comes up that reinforces my longstanding belief that the whole "finance market" is a huge con game. :-)

Sunil --

I"m still trying to understand what the financial market *is*.  So many variables .  .  .

Not having unfettered access to the NY Times, I'm not able to judge exactly what Fama meant when he said, "I don't even know what a bubble means".  It  may be that he views the price swings in the housing market in recent years as being attributable to something other than the classic, speculator-driven real estate booms and crashes that have precipitated depressions in previous decades and centuries. Prices do go up and down in the normal course of market functioning without needing to resort to a bubble explanation, cf the price of gasoline.  

I'd expect that a proponent of the efficient market theory (of which Fama may not be one, apparently :-)) can readily explain the collapse in real estate prices by pointing to the sheer impossibility of investors in mortgage-backed securities being able to valuate their securities.   Of course, I'm just speculating this is what Fama meant; I don't really know.

 

Jim P. -=

Here's an article from Reuther's about why both Fama and Schiller go the prize.  It makes some sense.

SAFT ON WEALTH-Invest like Fama but regulate like Shiller

Fama is good at telling us to what to do with our investment money.  Shiller is good ata telling the banks what to do with our money.

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About the Author

Eduardo Moisés Peñalver is the John P. Wilson Professor of Law at the University of Chicago Law School. He is the author of numerous books and articles on the subjects of property and land use law.