Eugene Fama: "I was getting kind of tired of French..."
October 14, 2013 5:07 PM   Subscribe

"... and so I took an economics course and I loved it," during a phone interview in the early morning today. Likewise, conversations with Robert Shiller and Lars Peter Hansen, shortly after the 2013 Sveriges Riksbank Prize in Economic Sciences was awarded jointly to them for their academic contributions to the field of asset pricing. UChicago News, Yale News, New York Times, Wall Street Journal, Washington Post, and Bloomberg report.

Eugene Fama: He is well-known for his efficient markets hypothesis, as proposed in the 1970 "Efficient Capital Markets: A Review of Theory and Empirical Work"; and, perhaps, less well-known outside of academia for his later work showing evidence against it--namely, the Fama-French 3-factor model. Marginal Revolution and Fama's colleague Professor John Cochrane comment. Fama expanded on his views of finance and efficient markets in a 2010 New Yorker interview and a 2012 EconTalk podcast.

Robert Schiller: He was one of the first to voice concerns about the housing bubble (2003 "Is There a Bubble in the Housing Market?"). Brad DeLong credits Shiller as the primary reason he became an economist; Marginal Revolution covers his variance bounds test and the Case-Shiller index. He wrote a number of blog posts for the NYT Sunday Business section on the housing bubble, and also spoke with Russ Roberts in a 2008 EconTalk podcast on the housing crisis. You can take his Financial Markets course online.

Lars Peter Hansen: Although he does not have the same name recognition as his fellow prize winners, he is renowned within the academic community for his major breakthrough in econometrics: the invention of Generalized Method of Moments (GMM) estimation as presented in his 1982 article, "Large Sample Properties of Generalized Method of Moments Estimators." GMM has proved instrumental in testing asset pricing theories such as those of Fama and Shiller. Guan Yang at Noahpinion attempts an explanation, as does Marginal Revolution.

The Economic Sciences Prize Committee provides a more detailed overview of their work in the report "Understanding Asset Prices":
This year’s prize awards empirical work aimed at understanding how asset prices are determined. Eugene Fama, Lars Peter Hansen and Robert Shiller have developed methods toward this end and used these methods in their applied work. Although we do not yet have complete and generally accepted explanations for how financial markets function, the research of the Laureates has greatly improved our understanding of asset prices and revealed a number of important empirical regularities as well as plausible factors behind these regularities.
posted by ilicet (23 comments total) 17 users marked this as a favorite

(Also: this is an excellent post, thank you. I'm still reading through all the links)
posted by triggerfinger at 6:13 PM on October 14, 2013

Fama expanded on his views of finance and efficient markets in a 2010 New Yorker interview

"It tells you something about somebody when quoting what he says at length is regarded as an attack on him, and a 'cheap shot'." -- Brad DeLong
posted by UrineSoakedRube at 6:15 PM on October 14, 2013 [2 favorites]

Heh, at first I was planning to quote from that interview, but then I figured it would be better to simply link.

shoot, I just saw the typo I made in the Schiller Shiller link. Self-made SPaG errors are always the most irritating.

triggerfinger: I admit it is amusing to see how bloggers try to pare down GMM for the general audience. On the other end of the spectrum, we have Fumio Hayashi's Econometrics, which--unlike most other textbooks I've encountered--is basically organized around GMM. Not so layperson-friendly, though.
posted by ilicet at 6:35 PM on October 14, 2013 [1 favorite]

"I was getting kind of tired of French..."

When I read that I thought it meant Fama's collaborator Kenneth French.... yes I am a nerd.
posted by miyabo at 7:01 PM on October 14, 2013 [6 favorites]

I think Fama deserves the Nobel, but it is amazing that he's also an idiot about his area of specialty. It tells you something about economics as a profession.
posted by leopard at 7:08 PM on October 14, 2013 [2 favorites]

"I was getting kind of tired of French..."

When I read that I thought it meant Fama's collaborator Kenneth French.... yes I am a nerd.

Me too, on both counts. I was absolutely expecting some sort of "Fama's a jerk because of some internecine issue between him and his collaborator" piece. Glad that was not the case.
posted by Guernsey Halleck at 7:13 PM on October 14, 2013

Thanks for putting this together, this is great.

Agreed that it's funny that all the news stories are basically focusing on Fama and Schiller and less so on Hansen. GMM basically is the workhorse approach in empirical macroeconomics and finance. As triggerfinger's link explained, it nicely encompasses most of the empirical techniques applied macroeconomists use.

The other reason that people may be focusing on Shiller and Fama to the exclusion of Hansen is that there's a sort of dialectic narrative you can write about their research, although that might be overblown. This Harvard Business Review article sort of sums it up. Basically Fama did a lot of the early, important empirical work in finance showing that asset prices follow a random walk (this is, incidentally, why stock picking is a fool's errand). Shiller showed that, taking the models seriously as Fama did, you can show that the stronger claims about financial markets are overstated or at least not supported by the evidence. Both were really important things to do. Fellow Nobel-ist Krugman made this point also.

Fama has said a lot of probably indefensibly silly things about the recession, but his approach to empirical work is basically inescapable in the academic study of asset prices, even among people who disagree with his conclusions.

Fama's colleague John Cochrane is ALSO HIS SON IN LAW, I don't know why that's so notable to me but it seems funny for some reason
posted by dismas at 7:15 PM on October 14, 2013 [1 favorite]

Fama basically denies the existence of financial bubbles. This is kind of like awarding the Physics nobel to a guy that denies the existence of black holes.

And even dumber, awarding it jointly in the same year with another guy who is known for pioneering research into black holes (i.e. Shiller).

What a fucking joke the economics "Nobel" prize is. (Here's Philip Mirowksi on why we have this stupid prize.)

What I find most annoying about Fama is that his main intellectual contribution - the "Efficient Markets Hypothesis" - is not an actual hypothesis, because it cannot be falsified. It's a tautology at best (i.e. "on average, an investor will not be able to do better than the average investor").
posted by moorooka at 12:00 AM on October 15, 2013 [4 favorites]


The Sveriges Riksbank Prize in Economic Sciences in Memory of Afred Nobel Who Would Have, Like, Wanted To Have a Prize in Economic Sciences and Shit but, Yeah, He Just Didn't Get Around to It, I Guess.

The Nokia Prize in Mobile Telephonic Sciences in Commemoration of Afred Nobel Who Once Took a Telephone Call On a Landline (Remember Those?) and He Probably Thought to Himself, Fuck, I Wish I Could Carry My Telephone Around in My Pocket Somehow and Not Have a Long Cord to Deal With, and Now you Totally Can.

The Twitter Prize in Brevity @alfrednobel.

The Nobel Peace Prize 2.0, Which We Are Really Serious About This Time So No More War Criminals, And You Can Totally Trust Us So Get Off Our Backs Already.

The Fox Network Fair and Balanced™ "Nobel" Prize in War.

The Nobel(RED) Prize for Bono, And You Haters Can Suck It.
posted by the quidnunc kid at 4:02 AM on October 15, 2013 [4 favorites]

As someone said here once: I'd prefer cash from the Swedish government to cash from the Nobel family to salve their guilt for war profiteering.
posted by anotherpanacea at 4:17 AM on October 15, 2013

Fama doesn't think Fama-French is evidence against EMH.

Anyhoo. HmL 4 Lyfe

(Tho the current explanation for why smb and hml outperform is way more in-line with Shiller's Animal Spirits than anything Fama says)
posted by JPD at 5:01 AM on October 15, 2013

It would be funny if it turns out that efficient markets imply P = NP. It seems like many economists take efficient markets seriously, but very few computer science researchers believe that P = NP.
posted by Jpfed at 5:06 AM on October 15, 2013 [4 favorites]

No really. There are very few serious economist who believe in hard EMP
posted by JPD at 5:18 AM on October 15, 2013 [1 favorite]

No really. There are very few serious economist who believe in hard EMP

The linked paper is about the weak-form efficient market hypothesis.
posted by Jpfed at 6:02 AM on October 15, 2013

The linked paper is about the weak-form efficient market hypothesis.

"We shall contend there is no important evidence against the hypothesis in the weak or semi-strong form tests...and only limited evidence against the hypothesis in the strong form tests"

I think most people believe the weak form of EMH is true - for some definition of "weak". Its broad enough that it almost couldn't be falsified. (Which is a fair criticism for sure)
posted by JPD at 6:16 AM on October 15, 2013

By "the linked paper", I meant "the paper I linked". To put the various conversational pieces together- the paper I linked shows that weak EMH implies P = NP. It is funny that most people believe that weak EMH is true, but basically nobody believes that P = NP.
posted by Jpfed at 7:07 AM on October 15, 2013

This paper does suggest, however, that the “price is right” assertion of the EMH is true only if
all patterns can be efficiently (i.e. quickly) evaluated, which can happen either if there is not too
much data, or if P = NP so that any efficiently verifiable predictable pattern is therefore
efficiently computable as well.

Its a little weird logic wise no. "Because this is basically impossible, and because that is therefore basically impossible - I'm going to postulate something - despite that fact that the empirical data is counter to my claims."

I mean its basically a paper arguing for a philosophical reason why the theories that argue Technical Analysis can't work - especially in the long run - written by a guy who studies/practices technical analysis for living.
posted by JPD at 7:40 AM on October 15, 2013

actually I guess he's a stat arb guy.
posted by JPD at 7:49 AM on October 15, 2013

That's a very theoretical paper that ignores a lot of things that could be happening in the real market.

First, even if the number of trading strategies is growing exponentially, that does not imply the number is too large to handle. If you can develop some heuristics to ignore trading strategies that are clearly unreasonable, you can exhaustively search the problem space.

Second (and the author mentions this) if you take into account the cost of the search for more-optimal trading strategies into your definition of the EMH the whole thing falls apart. Real actors aren't going to spend trillions of dollars building giant supercomputers just to eke out 0.1% more on the market.
posted by miyabo at 8:44 AM on October 15, 2013

This is a nice discussion on this year's prize and the Economics Nobel generally from Crooked Timber.
posted by dismas at 11:51 AM on October 15, 2013

John Cochrane also wrote a post today on Lars Hansen and GMM.
posted by ilicet at 8:09 PM on October 15, 2013

And on Robert Shiller's work, too.
posted by ilicet at 9:08 PM on October 15, 2013

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