Why Gene Fama Cancelled His Subscription to The Economist Magazine
…and why you should too. From John Cassidy’s terrific series of interviews with Chicago economists in The New Yorker:
JC: In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.
EF: I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the word bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy.
See also Cassidy’s interview with John Cochrane:
JC: So you take the Greenspan view that bubbles can’t be identified except in retrospect? In 2005, you didn’t think there was a housing bubble?
Cochrane: I think most people mean by a “bubble” just, “Prices were high and I wish I sold yesterday.” The efficient markets (hypothesis) never told you that wasn’t going to happen. What efficient markets says is that prices today contain the available information about the future. Why? Because there’s competition. If you think it’s going to go up tomorrow, you can put your money where your mouth is, and your doing it sends (the price) up today. Efficient markets are not clairvoyant markets. People say, “nobody foresaw saw the market crash.” Well, that’s exactly what an efficient market is—it’s one in which nobody can tell you where it’s going to go. Efficient markets doesn’t say markets will never crash. It certainly doesn’t say markets are clairvoyant. It just says that, at that moment, there are just as many people saying its undervalued as overvalued. That certainly seems to be the case.
Ok, now you know what “efficient markets” means. What is there about recent events that would lead you to say that markets are inefficient? The market crashed, to which I would say, we had the events last September in which the President gets on television and says the financial markets are near collapse. On what planet do markets not crash after that?
posted on 14 January 2010 by skirchner
in Economics, Financial Markets
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Comments
Don’t know. I thought Fama was horrible: in essence, he refused to engage in any sort of critical intellectual debate. Rather we got yet another recitation of the EMH dogma sans the nuances. Every time Cassidy asked him a detailed question, he laughed it off with a superficial wave of the hand.
Consider this:
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Back to the efficient markets hypothesis. You said earlier that it comes out of this episode pretty well. Others say the market may be good at pricing in a relative sense—one stock versus another—but it is very bad at setting absolute prices, the level of the market as a whole. What do you say to that?
People say that. I don’t know what the basis of it is. If they know, they should be rich men. What better way to make money than to know exactly about the absolute level of prices.
So you still think that the market is highly efficient at the overall level too?
Yes. And if it isn’t, it’s going to be impossible to tell.
For the layman, people who don’t know much about economic theory, is that the fundamental insight of the efficient market hypothesis—that you can’t beat the market?
Right—that’s the practical insight. No matter what research gets done, that one always looks good.
What about the findings that long periods of high returns are followed by long periods of low returns?
Now, there is no evidence of that…
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Terrible really. Cochrane’s interview is much better. I don’t agree with him but at least his answers were half-way intelligent.
Posted by Ilya on 01/14 at 11:27 PM
He’s very tolerant - I stopped reading the Economist in the mid 1990s.
Posted by .(JavaScript must be enabled to view this email address) on 01/15 at 03:49 AM
Is this significant?
Posted by .(JavaScript must be enabled to view this email address) on 01/15 at 07:31 AM
Fama was wrong by a factor of two. They used the world ‘bubble’ six times in the story which goes with that cover.
Posted by skirchner on 01/15 at 07:45 AM
I think the quote from Cochrane gets it spot on. The interviews are fascinating. I suppose both Fama and Cochrane are academics rather than practitioners, so their diagnoses of the causes of the financial crisis are not all that satisfying. But on the EMH (and Krugman) they are doubtless correct. Must check out the New Yorker!
Posted by .(JavaScript must be enabled to view this email address) on 01/15 at 09:37 PM