Why not Nobel Prizes for one and all? says Professor Shiller -- "even if we sometimes seem to come from different planets.""Actually, I do not completely oppose the efficient-markets theory. I have been calling it a half-truth. If the theory said nothing more than that it is unlikely that the average amateur investor can get rich quickly by trading in the markets based on publicly available information, the theory would be spot on. But the theory is commonly thought, at least by enthusiasts, to imply much more."-- Nobel economist Robert Shiller, in a NYT "Economic View"column, "Sharing Nobel Honors, and Agreeing to Disagree"by KenA lot of us who aren't exactly close followers of the inner workings of the economics profession were fascinated by this year's three-pronged Nobel award to economists who have all done work relating to markets, but work that seems, at least in two of the cases, the University of Chicago's longtime free-market worshipper Eugene Fama and Yale's more real-world-oriented Robert Shiller, openly contradictory.I was happy to turn to Paul Krugman, who declared in the blogpost "The Nobel" that he's "actually fine with the prize."
It's an old jibe against economics that it's the only field where two people can win the Nobel for saying exactly the opposite thing; even the people making that jibe, however, probably didn't envisage those two guys sharing the same prize, which is kind of what happened here.But I am actually fine with the prize. Fama's work on efficient markets was essential in setting up the benchmark against which alternatives had to be tested; Shiller did more than anyone else to codify the ways the efficient market hypothesis fails in practice. If Fama has said some foolish things in recent years, no matter -- he did earn this honor, as did Shiller. As for Hansen, his work involves econometric methods on which I have no expertise at all, but I'll trust the experts who consider it great work.So, all good -- and you actually have to admire the prize committee for finding a way to give Fama the long-expected honor without seeming as if they are completely out of touch with everything going on around them.
This worked for me. Fama was getting a Nobel to make up for the one he didn't get when the Nobel people were handing them out like door prizes to Chicago economists, a number of them less deserving, and he even contributed to Shiller's work by providing an up-to-date version of the theory Shiller earned his prize by discrediting.Now Shiller himself has gone public with his feelings about the "obvious incongruity" of this year's Economics prize, which he says harks back to 1974, when "the Nobel committee gave a joint prize to Gunnar Myrdal, a Social Democrat in Sweden and a proponent of the welfare state, and Friedrich Hayek, a conservative who believed that government should be minimal."Eventually Shiller gets around to being diplomatic:
[L]ike Professor Hansen, Professor Fama is a first-class scholar who does careful research on the topics he focuses on.We disagree on a number of important points, but there is nothing wrong with our sharing the prize. In fact, I am happy to share it with my co-recipients, even if we sometimes seem to come from different planets.
But in getting there, Shiller has what seems to me like some naughty fun. First, he deals with the third recipient, Lars Peter Hansen, yet another Chicago guy. He notes that Hansen "is well known for having rejected one form of the efficient-markets model," but says his heart still seems to be with what the Chicago markets fetishists call the "rational expectations" that make markets so wise and dependable.With regard to the other winner, however:
Professor Fama is the father of the modern efficient-markets theory, which says financial prices efficiently incorporate all available information and are in that sense perfect. In contrast, I have argued that the theory makes little sense, except in fairly trivial ways. Of course, prices reflect available information. But they are far from perfect. Along with like-minded colleagues and former students, I emphasize the enormous role played in markets by human error, as documented in a now-established literature called behavioral finance.
As I've noted at the top of this post, Shiller says he doesn't "completely oppose" efficient-markets theory; he just considers it "a half-truth."
If the theory said nothing more than that it is unlikely that the average amateur investor can get rich quickly by trading in the markets based on publicly available information, the theory would be spot on. I personally believe this, and in my own investing I have avoided trading too much, and have a high level of skepticism about investing tips.But the theory is commonly thought, at least by enthusiasts, to imply much more. Notably, it has been argued that regular movements in the markets reflect a wisdom that transcends the best understanding of even the top professionals, and that it is hopeless for an ordinary mortal, even with a lifetime of work and preparation, to question pricing. Market prices are esteemed as if they were oracles.
He doesn't make nice about this.
This view grew to dominate much professional thinking in economics, and its implications are dangerous. It is a substantial reason for the economic crisis we have been stuck in for the past five years, for it led authorities in the United States and elsewhere to be complacent about asset mispricing, about growing leverage in financial markets and about the instability of the global system. In fact, markets are not perfect, and really need regulation, much more than Professor Fama's theories would allow.
And now he's ready for his fun (links onsite):
It's interesting that Professor Fama is also the intellectual father and major adviser of an investment company that has, by many accounts, been beating the market. The company, Dimensional Fund Advisors, has impressed investors with its performance so much that its assets under management have grown to $296 billion, as of Aug. 31.
You see what he's done here, right? Normally it would be considered a feather in Fama's hat to be known for providing investment advice that beats the market. But how is this possible for a "rational expectations" maven? After all, according to believers of Fama's camp, financial prices efficiently incorporate all available information and are in that sense perfect.Shiller turns to the DFA website and turns up some rather murky rational-expectations hemming and hawing, and points out that "he has ended up with an investing approach that looks, in some of its fundamental principles at least, a little like my own." He adds, "I can even recommend that people might consider investing in D.F.A."
I would not, however, recommend that monetary or fiscal authorities seek inspiration from his theories on how to stabilize the economy. He doubts the existence of any bubble before this crisis, and his philosophy would have let banks fail at the beginning of it.
And he concludes that both of the 2013 Chicago Two are "first-class scholars" doing "careful research" on their chosen subjects, and never mind that they're wrong. Okay, that last part is me, not Shiller, but isn't that what we means when he talks about the three of them "disagree[ing] on a number of important points" and "sometimes seem[ing] to come from different planets." That doesn't make them bad Nobel Prize recipients, does it?#For a "Sunday Classics" fix anytime, visit the stand-alone "Sunday Classics with Ken."
