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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