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  • (instrumental piano music)

  • - Many economists view financial markets

  • as efficient with prices incorporating

  • all available information about future values.

  • Behavioral economists say that model

  • simply doesn't reflect how markets actually work.

  • So are markets efficient?

  • Welcome to The Big Question,

  • the monthly video series from Chicago Booth Review.

  • I'm Hal Weitzman and I'm joined by an expert panel.

  • Eugene Fama is the Robert R. McCormick

  • Distinguished Service Professor of Finance at Chicago Booth.

  • Well-known for his empirical analysis

  • of asset prices and for developing

  • the efficient market hypothesis,

  • he was the joint recipient

  • of the 2013 Nobel Prize in economic science,

  • and Richard Thaler is the Charles R. Walgreen

  • Distinguished Service Professor

  • of Behavioral Science and Economics at Chicago Booth.

  • He's director of Booth's center for decision research

  • and co-author of the bestseller, Nudge.

  • His most recent book is Misbehaving

  • The Making of Behavioural Economics.

  • Panel, welcome to The Big Question.

  • Gene Fama, let me start with you.

  • You came up with the efficient market hypothesis,

  • so tell us briefly, what is it?

  • - [Voiceover] Well, it's a very simple statement

  • that prices reflect all available information.

  • Testing the hypothesis turns out to be more difficult,

  • but it's a simple hypothesis in principle.

  • - Okay, Richard Thaler, do you agree that market prices

  • reflect all available information?

  • - Well.

  • Like Gene says, it's easier to say than to test

  • and I like to distinguish two aspects of it.

  • One is whether you can beat the market,

  • that's the one most people are most interested in,

  • and the other is whether prices are correct,

  • so if prices reflect all information,

  • then they should land on the right price

  • and we can separate those questions

  • because they're different.

  • - Okay, but the basic premise

  • about the containing information

  • is something you don't agree with then, it sounds like?

  • - It's almost impossible to test that hypothesis.

  • Except through the two questions that I've asked,

  • can you beat the market and are prices right?

  • - Okay, is that right, Gene Fama?

  • If you say that prices reflect all available information,

  • it necessarily means that a price is right

  • at any particular point in time?

  • - That's the statement of the hypothesis,

  • but it's a model, it's not completely true,

  • no models are completely true.

  • They're approximations to the world, the question is,

  • for what purposes are they a good approximation?

  • As far as I'm concerned,

  • they're a good approximation from almost every purpose.

  • I don't know any investors who shouldn't be able

  • if markets are efficient, for example,

  • and there are all kinds of test

  • with respect to the response of prices

  • to specific kinds of information

  • in which the hypothesis that prices adjust quickly

  • to information looks very good.

  • There are others that looks less good.

  • So, it's a model, it's not entirely always true,

  • but it's a good working model for most practical uses.

  • - Okay, is that right, is it a good working model?

  • - Well.

  • I think for the first part, can you beat the market?

  • I think Gene and I are in

  • virtually complete agreement

  • which is that's a good working hypothesis for any investor.

  • - Does that mean you should assume,

  • any individual investor should assume

  • that markets are efficient?

  • - Behave as if, would be the way you put it.

  • - Well, behave as if.

  • - Well, yeah, certainly,

  • there's evidence going back to

  • the thesis of Mike Jensen who was,

  • I guess, I mean, one of Gene's first students,

  • who was around at the same time,

  • who did a thesis on whether mutual funds, on average,

  • beat their benchmarks,

  • and after they account for their fees, they don't,

  • that was in the 60s, it's been updated a zillion times.

  • You can quibble about exactly how to do it,

  • but that's approximately true.

  • So.

  • Just investing based on fees

  • is not a dumb thing to do

  • regardless of the nuances that Gene and I might get into.

  • - Okay, but you talked earlier about,

  • in some cases, the model works,

  • in other cases, it works less well.

  • In your book, Richard Thaler,

  • you talk about the 1987 crash, Black Monday,

  • and you give that as an example of how prices are not right,

  • the efficient markets don't really work.

  • You say, "If prices are too variable,

  • "they're in some sense wrong.

  • "It's hard to argue the price at the close trading

  • "on Thursday, October 15th,

  • "and the price at the close of trading the following Monday,

  • "more than 25% lower, can both be rational measures

  • "of intrinsic value given the absence of news,"

  • but isn't the idea that efficient markets

  • are supposed to be unpredictable?

  • - Yes, but unpredictable doesn't mean rational.

  • I have a two year old granddaughter

  • who runs around like crazy,

  • and I defy anyone to

  • use a rational model to predict what she's gonna do next,

  • so she will be unpredictable,

  • but her behavior isn't well-captured by

  • a model of maximizing

  • anything other than what she calls fun.

  • - So, does the market behave

  • in the same way as your granddaughter?

  • - Well, sometimes.

  • I don't think anyone thinks

  • that the value of the world economy fell 25% that day.

  • Nothing happened.

  • - So, if markets were efficient,

  • there would be a certain bounded level of volatility?

  • So, if--

  • - Well, in the absence...

  • It's not a day when World War III was declared.

  • - But it was a time where people were talking about,

  • perhaps an oncoming recession

  • which turned out not to happen,

  • so in hindsight, this was a big mistake,

  • but it needn't have been.

  • So, in hindsight, every price is wrong.

  • - Yeah.

  • - That's 20/20 hindsight.

  • - That's 20/20 hindsight,

  • but what I would say is merely

  • the big fluctuations that entire week.

  • Two of the biggest up days in history occurred that week

  • and three of the biggest down days

  • and nothing was happening

  • other than the fact that people were talking about

  • how markets were going up and down

  • like crazy all over the world,

  • so that's one...

  • indirect way that we can measure market efficiency.

  • (coughs)

  • This was essentially the approach

  • that was pioneered by Bob Shiller,

  • who Gene shared the Nobel Prize with,

  • and his argument was prices fluctuate too much

  • to be explained by a rational process.

  • - Right, and Gene Fama, is that right?

  • There's a certainly level at which prices

  • just fluctuate too much?

  • - Well, there's a test for that

  • and the test says that

  • when we look at longer periods of time,

  • the variants of the price changes

  • should not grow like the length of the time period.

  • If there is all of this temporary variation in prices,

  • that's not rational and, in fact, that does not indicate

  • that there's temporary variation in prices,

  • so you gotta kind of come up with a different test.

  • Shiller's model was based on the proposition

  • that there's no variation through time in expected returns,

  • but we know there is a ton of variation in expected returns,

  • so that kind of branch of testing, people lost interest in

  • because you really can't come to any conclusions.

  • A straight test of whether

  • there's temporary variation in prices says,

  • "No, there isn't, you can't identify it"

  • and another test which would be,

  • is there too much variation in expected returns

  • to be attributed to rational behavior?

  • Well, now you have to define what you mean by that

  • and that's terribly difficult.

  • - But did augment then that investors

  • are constantly changing the view

  • of the expected future value of the shares?

  • - My view is that risk aversion

  • moves dramatically through time.

  • In particular, it's very high during bad periods

  • and it's lower during good periods,

  • and that affects that pricing of assets

  • and then the expected returns you expect.

  • - And so, every time there's a stock market crash,

  • people come to you, are they,

  • "Rubbish the idea of efficient markets,"

  • and point to this massive volatility

  • and say, "Does that prove that efficient markets are wrong?"

  • And then--

  • - Doesn't prove that at all.

  • - [Hal] What it proves is what?

  • Is that risk changes a lot very quickly?

  • - Well, the information changes a lot through time.

  • - Dick Thaler, let me turn to you.

  • Bubbles.

  • Gene Fama famously does not allow

  • use of the word bubble, but I'm gonna use it.

  • Do bubbles exist?

  • How do we define bubbles?

  • - Well, I think it's hard to say.

  • I'm gonna present two examples.

  • One which is,

  • I think, more convincing than the other.

  • The first one is of a graph that I think you'll show

  • the viewers,

  • it was produced by

  • Gene's son-in-law, John Cochrane,

  • and it's a graph of house prices

  • over a very long period of time in the US,

  • and what it shows is that, for a long period of time,

  • house prices were roughly 20 times rental prices,

  • and then starting around 2000, they go up,

  • depending on which measure you use,

  • they go up a lot or they go up a really lot,

  • and then they go back after the financial crisis.

  • I can't use this graph to convince Gene

  • that markets are inefficient.

  • - True.

  • Because the graph stops too soon.

  • - Well, yeah, but, you know,

  • we're not gonna live long enough to--

  • - No, no, no, I mean, if you continue the graph,

  • it goes back to the peak.

  • - Well, but--

  • - So, what's the bubble, the down, the up,

  • the subsequent down--

  • - Well, okay.

  • So, once again, we're in agreement which is that

  • studying data like this,

  • it's impossible to know for sure

  • whether something's a bubble

  • and there are hints in that graph

  • that prices seem to have diverged

  • from a level that had existed for a very long time,

  • they went up and then they went down.

  • Was this because of irrational exuberance

  • on Greenspan's phrase?

  • What we do know is that in the markets

  • like Vegas and Scottsdale and south Florida

  • where prices were going up the most,

  • expectations of future price appreciation

  • were also the highest

  • and that could be rational, but

  • I'm skeptical of that and of course, in hindsight,

  • it was wrong, but let me present another example

  • which is amusing at least.

  • Have I told you about this one?

  • The Cuba fund? - No.

  • No.

  • - Okay, this is good.

  • So, there's a closed-end mutual fund

  • that happens to have the ticker symbol, CUBA.

  • Now, closed-end funds

  • have been studied for many years.

  • They're a special kind of mutual funds

  • where the shares trade in markets

  • and the price of the shares can deviate

  • from the value of the assets that they own.

  • So, particular fund,

  • although it has the ticker symbol CUBA,

  • of course, cannot invest in Cuba.

  • A, that would be illegal

  • and B, there are no securities.

  • So, its holdings of Cuba are zero,

  • and for many years, it traded it at a discount

  • of about 10 to 15% of net asset value,

  • meaning that you could be a hundred dollars

  • worth of their assets for $85 to $90

  • which is a good bargain.

  • Then, if we look at the chart,

  • all of the sudden, one day, the price skyrockets

  • and it sells for a 70% premium,

  • and you could probably guess what happened,

  • that was the day that President Obama

  • announced his intention to relax relations with Cuba,

  • so a bunch of securities you could buy for $90 on one day,

  • it cost you $170 the next day.

  • Now, that I call a bubble.

  • Unlike the first case, where Gene and I could argue forever

  • as to whether those home prices were rational or irrational,

  • I'm pretty sure Gene doesn't think

  • that it would be smart to pay $170

  • for a hundred dollars worth of cruise ship lines

  • and Mexican companies, and all through this period,

  • there was no change in the value of their assets,

  • so it's not like the market was anticipating

  • some boom in the Caribbean, this is just a mistake.

  • - Okay, Gene Fama, this is an anomaly,

  • but it's also a bubble in your terminology.

  • - Both.

  • - Well, it's a one day bubble.

  • - No, no.

  • It goes up and then it takes a year--

  • - [Gene] To come back.

  • - [Richard] To come back.

  • - [Gene] Well, it drops most of their 170 next.

  • - Well, I mean, a few months later, it's still--

  • - Anyway, it's an anecdote not--

  • - Well, yeah.

  • - There's a difference between anecdotes and evidence.

  • - Okay, so.

  • As, you know, I have lots of these anecdotes like

  • my paper with Owen

  • on Palm and 3COM.

  • - That, oh, okay, that one, right.

  • - This was an example where a part of a company

  • was worth more than the whole company.

  • - That can happen, but.

  • - Yeah, but.

  • - 'Cause the rest of the company can be unprofitable.

  • - Yeah, but the rest of the company

  • was actually the only profitable part in this case.

  • (indistinct crosstalk)

  • - I should say for more details on that case,

  • people can read your book, Misbehaving.

  • - Correct.

  • - But the point here is you think--

  • - I don't deny that.

  • I don't deny that there exist anecdotes

  • where there are problems, I don't deny that, it's just,

  • for example, for bubbles,

  • I want a systematic way of identifying them.

  • In my view, it's a simple proposition.

  • You have to be able to predict

  • that there is some ending to it

  • and all the test that people have done

  • trying to do that, they can't do it.

  • So, statistically, people have not come up

  • with a way of identifying bubbles.

  • I think that there's a lot of identification of bubbles

  • based on 20/20 hindsight,

  • and it's very easy to do in that situation.

  • For example, irrational exuberance,

  • but that was Shiller that takes credit for that

  • which if you actually date the time,

  • the market goes up more afterward,

  • it never goes back to that point.

  • So, irrational exuberance never went away,

  • if that's what it was.

  • - So, this is where we are and why do I bring up

  • amusing anecdotes which I agree this is.

  • It's a speck.

  • And when Owen Lamont and I presented our paper

  • in the finance workshop,

  • presenting another one of these anecdotes,

  • Gene and I got into a discussion of icebergs

  • and Gene's point was that like this is the iceberg.

  • Yeah, that I can go find these cute little anecdotes--

  • - [Hal] The whole problem.

  • - And okay, little stuff can go wrong.

  • My argument is and there's no way to prove

  • which one of us is right,

  • is look, these are the few cases where we can test

  • whether the price and intrinsic value are the same.

  • It shouldn't be that a small unprofitable part of a company

  • is worth than the entire company

  • where the rest is profitable,

  • it shouldn't be true that shares of the CUBA fund

  • are selling at a 70% premium.

  • Now, I go to these and say,

  • "Look, if the market can't this right...

  • - But there are other examples

  • of cases where you can't test it.

  • For example, parimutuel markets are a good example.

  • You can test where they are,

  • they're good predictors of eventual outcomes

  • and they tend to be very good.

  • - Well, they're very good, although there's

  • something called the favorite-longshot bias,

  • so if you go to the racetrack,

  • you shouldn't bet because they take 17%,

  • but if you do, you wanna bet on favorites

  • because like a hundred to one longshot

  • will win one race out of 400.

  • So, the prices are correlated

  • and the deviations aren't enough to beat the 17% spread,

  • but there are some anomalies.

  • - I just wanna press you there for a second.

  • How do you define the bubbles then?

  • - Well.

  • I would say.

  • Bubbles are when

  • prices exceed

  • a rational valuation

  • of the securities being traded.

  • - That's right, but what's the test of that?

  • - Well, the only tests that are clean

  • are these anecdotes

  • like closed-end funds where we know the value of the assets

  • and we know the price and we can see that they're different.

  • For something like the real estate market,

  • we only have a suspicion and we can't prove it, although,

  • I have some ideas I'm working on

  • with one of our golf buddies to

  • figure out how to predict when a bubble's gonna end.

  • - Okay, sounds like a good reason to play more golf,

  • but to go back to the iceberg for a second,

  • if financial markets are inefficient

  • and you're saying that there's more that we haven't see,

  • that's the point of the iceberg example,

  • where are the biggest inefficiencies?

  • - Well, again, it depends on

  • which definition we're using,

  • so where are you most likely to be able to beat the market?

  • Smaller firms.

  • Less developed countries, although, even there,

  • the advantage that active managers have

  • is relatively small.

  • - [Hal] Okay, and that--

  • - But there are other,

  • those, to me, seem like,

  • that one you'd have to test whether that actually worked,

  • we have tested that, that one doesn't work,

  • but things that are more systematically tested

  • that are indications of some degree of market inefficiency

  • are, for example, the accountants have long established that

  • the adjustment of announcements to earnings

  • is very quick, but not complete,

  • it takes a few more days before there's complete adjustment,

  • not enough to make any profits on, but so what?

  • It's still a slower adjustment,

  • so that's an indication that

  • the market's not completely efficient.

  • The whole process, the whole momentum phenomenon

  • gives me problems, it could be risk,

  • but if it's risk, it changes much too quickly

  • for me to capture it in any asset-pricing model,

  • so that one gives me the biggest problems of all,

  • so the point is not that markets are efficient,

  • you know they're not, that's just the model,

  • the question is, how inefficient are they?

  • I tend to give more weight to systematic things

  • like failure to adjust completely to earnings announcements

  • or momentum than to anecdotes

  • which, to me, less...

  • They're fine, but they're just little things popping up.

  • They're curiosity items rather than evidence.

  • - But Dick Thaler highlighted one area where you do

  • reach a better value premium,

  • that low price stocks tend to do better.

  • - That one's unresolvable.

  • - But you both have different explanations

  • why that's the case, so can you give your explanation

  • and tell me what your evidence--

  • - Well, my explanation is that

  • value stocks are just riskier than gross stocks.

  • Initially, the people who thought that wasn't true,

  • thought that there was an arbitrage opportunity

  • in value versus growth,

  • that if you went long value and short growth,

  • you'd get a portfolio at a very low variance

  • and a high return, turned out that wasn't true,

  • if you want a long one and short the other,

  • you gotta enact it a very high variance.

  • So, it looked, smelled, and taste like a risk factor,

  • but you can't really establish that

  • unless you can tell me why this source of variance

  • carries a different price per unit

  • than other sources of variance

  • because that's what you're into as soon as you deviate

  • from the basic capital asset pricing model,

  • that you're really seeing different sources of variances

  • carry different prices of per unit of variance.

  • The FamaFrench three-factor model is kinda the first one

  • to put that into operation and 20 years have passed,

  • and people have been trying for 20 years

  • to identify whether that's due to some taste factor

  • or something people are trying to hedge against.

  • Although, I have a vested interest in saying,

  • "Good, somebody's identified what hedges against,"

  • I don't really find it convincing,

  • the arguments on either side,

  • so I think that's just an open issue at this point,

  • that's why I said that it's just basically unresolvable

  • at least as far as the test will.

  • - I pretty much agree with that.

  • Gene and Ken have gone now to a five-factor model where--

  • - We're still working on it.

  • Maybe four, maybe five.

  • - Okay, but.

  • - You could add momentum and go six.

  • - Yeah, there you go.

  • In my view, there was one rational model of stock price

  • and that was the capital asset pricing model

  • and I think in a world of rational investors,

  • the CAPM would be true.

  • - No, that's false, but.

  • - That's what I think.

  • - (chuckles) There's no multi-period model

  • that ever leads to the CAPM.

  • - Well, in any case, it's certainly not true.

  • - That's true.

  • - And we have these other factors

  • like size and value

  • and narrow profitability and investment.

  • Now.

  • I've looked hard

  • to find the way in which value stocks

  • are riskier than growth stock

  • and I have been unable to find them.

  • I agree with Gene that

  • betting on that spread is a very risky activity.

  • Any hedge fund that did that

  • would've gone out of business in the late 1990s.

  • But that doesn't mean that the

  • explanation for the abnormal returns

  • is due to risk, nobody can prove that.

  • - So, what is your explanation?

  • - I think that value firms look scary.

  • And they get a pyramid for that.

  • - There's another story that has,

  • they don't have to look scary,

  • it's just people don't like 'em.

  • And economists don't like it,

  • but taste of value stocks tend to be

  • lower-performing companies who have

  • few investment opportunities and aren't very profitable.

  • And maybe people just don't like those.

  • So, that story, to me, has more appeal than

  • a mis-pricing story

  • because mis-pricing, at least in the

  • standard economic framework,

  • should eventually correct itself

  • and it shouldn't keep repeating

  • whereas tastes can go on forever.

  • - So, I would disagree with that.

  • - Which part?

  • - So, I don't think you can call it taste.

  • - I don't know, I'm not saying I can call it that,

  • I'm saying that appeals to me more.

  • - Suppose you say you like

  • $20 bills.

  • And you're willing to take four 20s for a hundred.

  • Now, that's taste.

  • Now, I'm gonna make a lot of money.

  • - That's an arbitrage.

  • - Yeah, well--

  • - There's no arbitrage here.

  • - But the question is,

  • if the people who dislike value stocks

  • and that's just taste and it's wrong.

  • - It's not wrong.

  • Remember now, we're economists,

  • you're a behaviorist, that's even worse,

  • so you don't comment on people's tastes.

  • - Yeah, I do when they say that they like four 20s,

  • better than a hundred.

  • - That's an arbitrage, that's different.

  • - Well.

  • - Suppose I tell you I like apples better than oranges.

  • - Then, that's taste.

  • - Okay.

  • - So--

  • - That's value stock to a gross stock.

  • I'm not arguing for it, I'm just saying it's a possibility.

  • - Well.

  • But, look.

  • We're both affiliated with asset management firms

  • and both of our firms invest,

  • at least partially, in small value stocks.

  • Now, we're hoping to earn high returns and do, so.

  • - Well, sometimes, but not--

  • - Yeah, sometimes, not all the time or it wouldn't work.

  • If we're buying those stocks because people don't like them,

  • we're only gonna make money if they change their mind.

  • - [Gene] Some, some people.

  • - Or some people change their mind,

  • and so that's why the taste argument.

  • I mean, I think you're more behavioral than me now.

  • - I'm an economists, economics is behavior.

  • There's no doubt about it.

  • - Thaler, you'll print that all economics

  • should be behavior,

  • - No, but there's a difference.

  • - Why couldn't we have stopped just there?

  • - No, no, no, wait, there is a difference

  • because yours is irrational behavior, mine is just behavior.

  • - Oh, no, I hate the word rational.

  • - Oh, good.

  • - The distinction I make is whether behavior is predictable

  • for a rational model.

  • - Okay.

  • - And I'm willing to include behavior

  • that is not predicted by a rational model.

  • - Oh, okay, no, I would agree with that.

  • - And look, I think,

  • at the end of my book, I call for what

  • I call evidence-based economics

  • and I think that's what Gene does and has always done.

  • There's no way,

  • the point I was making about the five-factor model

  • or the three-factor model is there's no way

  • you can derive that

  • from some axiomatic first principles.

  • - No, you can't.

  • It falls in the context of Merton's model,

  • but you have not identified the relevant state variables

  • that would give rise to it,

  • and I think it's actually more complicated than that,

  • that no one of these is really associated

  • with a state variable, they're all linear combinations

  • of multiple state variables combined in different ways.

  • - Right.

  • - Which makes the problem very difficult to unravel.

  • - But the way in which you and I are the same

  • is we're both interested in understanding the world.

  • - Right.

  • - And, you know, I have some prurient interests

  • in things like the CUBA fund.

  • You know, at the main level,

  • I think we would both like to know

  • what caused housing prices to go up so fast

  • and then back down?

  • - And then back up again.

  • - Well, yeah, certainly, part of the way up

  • not exactly in the same places.

  • And if those prices were wrong in some sense,

  • then it would be good to know.

  • - Absolutely.

  • Total agreement on that.

  • - If I were the chair of the FEDF

  • or in charge of Freddie and Fannie,

  • if I saw

  • places like Vegas and Scottsdale

  • were in the 1990s, I would be raising lending requirements.

  • You could borrow at,

  • well, there were the, you know, liar loans,

  • but you could borrow at very low interest rates

  • and very low down payments into what looks like a

  • pretty pricey market.

  • - So, you're saying policymakers should use bubbles

  • as a way to step in and intervene?

  • - But very gently, it's not that I think that

  • policymakers know what's gonna happen, but

  • if they see what looks

  • disturbing, they can lean against the wind a little bit

  • and that's as far as I would go.

  • Something we certainly both agree about is--

  • - No, not on that one.

  • - No, no, I'm gonna say something

  • I think we both agree about is that we,

  • stock markets, good or bad, are the best thing we got going,

  • so nobody's devised a way of

  • allocating resources that's better.

  • - Than markets in general.

  • - Than markets in general,

  • we're in total agreement about that.

  • - There's disagreement about whether policymakers

  • ever get it right, though.

  • (laughter)

  • - Well, it sounds like you're asking policymakers

  • to step into the market that you just said was--

  • - Yeah, right, they all most surely

  • will do more harm than good.

  • - Yeah, well...

  • The argument that whether the policymakers

  • ever get it right, I think--

  • - Now, that's a little strained,

  • but I'm balanced whether they cause more harm than good.

  • - Yeah, but if they listened to us--

  • - No, no, then they'd surely cause more harm than good.

  • (richard chuckling)

  • - Gene Fama, you said earlier you're a behavioral economist,

  • has your thinking been shaped

  • by the sort of behavioral science

  • that Dick Thaler has pioneered?

  • - No, but.

  • - [Hal] Was the three-factor model

  • a response to some of the work that Dick--

  • - No, absolutely not.

  • It was a response to the data, basically.

  • It's what we call an empirical asset pricing model,

  • it has this vague connection to Merton's model,

  • but it was really empirically inspired,

  • those were factors that were screaming at us

  • from the data, basically, and we put them in there,

  • and got a lot of credit for it,

  • but it really was kind of an obvious thing to do,

  • and it's had a 20 year run,

  • so we can't complain about that,

  • that's as long as the run CAPM had,

  • so can't really complain.

  • - To your mind, has behavioral science,

  • what impact has it had on economics?

  • - Oh, I think there are, phew,

  • every economics department is into it

  • to some extent or another, right?

  • - Yeah.

  • - It's still kind of,

  • what I'd call curiosity items rather than,

  • in other words, 20 years ago I made this criticism

  • of behavioral finance that it was really just

  • a branch of efficient markets

  • because all they were was complaining about us,

  • so I was like probably the most important

  • behavioral finance person because without me,

  • there was no behavioral finance.

  • - You were the reference point, yeah.

  • - I'm the guy to criticize.

  • I still think that that's true,

  • there is no behavioral asset pricing model

  • that can be tested front to back.

  • - Well, there's no asset pricing model.

  • - Whoa, that's a really nihilistic point of view, though.

  • - Well.

  • - [Hal] But you have said, Dick Thaler,

  • - No theoretical one.

  • - You've said that you refer to the,

  • I mean, the efficient market hypothesis

  • remains the kind of,

  • the standard to,

  • to which your work is directed.

  • - Yeah, that's true of all economic models,

  • so you know,

  • expected utility theory is the right way

  • to make decisions under uncertainty, people don't.

  • In my managerial decision-making class,

  • I give them rules at the end of class,

  • and one is ignore some costs, assume everyone else doesn't,

  • and that's kind of my philosophy of life.

  • I believe the rational model

  • and I think a lot of people screw it up,

  • and we can build richer models

  • and models with a

  • better predictive power,

  • if we include the way people actually behave

  • as a oppose to they way fictional creatures that are--

  • - The so-called Econs.

  • - The Econs that are

  • as smart as Kevin Murphy

  • and have no self-control problems.

  • I don't know anybody like that.

  • - One of the criticisms that's made sometimes of you

  • is that what you're pointing out is essentially anomalies

  • like the CUBA fund and there is no overarching theory

  • which other people can then try to reject.

  • Do you need a theory, will there be a theory?

  • - No, there won't.

  • Well, there won't be a new overarching theory,

  • we've got one.

  • It just happens to be wrong.

  • - Like all theories, but.

  • - Yeah, so.

  • And so, it's not gonna be like the Copernican revolution

  • where having the earth in the middle was clearly wrong

  • and having the sun in the middle was right.

  • It's not gonna be like that.

  • It's gonna be more like engineering.

  • So, physics, in its pure form, with lots of assumptions

  • doesn't build good bridges, you need engineering,

  • and that's what the behavioral approach to economics is,

  • and I don't think it's really all that different

  • than what Gene does.

  • - Is this really an academic debate?

  • You said at the beginning that you essentially agree

  • about investing strategy, what regular investors should do,

  • so is this a debate that really

  • affects the typical investor, retail investor?

  • Gene Fama?

  • - I don't think, I mean, I think when Kahneman was asked

  • after the got the Nobel Prize, how should investors behave?

  • He basically said they should buy index funds,

  • that seems to be the model,

  • but then they come from it from a different perspective

  • because since they think everybody's irrational,

  • the only way to make them rational

  • is to tell 'em what to do, that's possibly rational

  • whereas I think the rational thing to do

  • because prices reflect available information, pretty much,

  • is to be a passive investor,

  • but my complaint about lots of stuff

  • that falls under behavioral finance,

  • and this is not a complaint of him,

  • I always say that he is very,

  • he knows the psychology aspect of stuff

  • and he's always oriented towards that.

  • There are lots of acolytes of behavioral finance

  • who are pure data dredgers,

  • all they're doing is out there looking for anomalies,

  • they have no connection to anything in psychology.

  • If you look at a behavioral finance NBER thing,

  • it will be populated with those kinds of people

  • that are pure data dredging looking for anomalies,

  • and that's, I think,

  • I don't know, I think I'd cut them off

  • the program (chuckling) if I were you.

  • - Well, I'll agree to that

  • if we can cut the theory dredging.

  • - But what about this idea

  • that this may be just an academic debate,

  • doesn't really affect individual investors

  • or indeed, as you said earlier,

  • both of you are involved with money-management firms

  • that seem profitable, so someone would say,

  • "Well, you're coming at it

  • "from completely different perspective,

  • "you're able to make money,"

  • basically with the same strategy as you pointed out,

  • what is the big disagreement here?

  • - Well, the strategies aren't exactly the same

  • and David Booth is a better marketer

  • than anybody at Fuller and Thaler, but

  • no, I think,

  • if there's non-academic point about this,

  • it's whether

  • things like

  • let's say the rise of technology stocks

  • and in Gene's honor, I won't refer to it as a bubble,

  • whether that was a misallocation of resources and--

  • - In hindsight, it was.

  • In foresight, not necessarily.

  • - In hindsight, it was.

  • If the rise and fall of technology stocks was a bubble--

  • - Internet stocks, you mean, not--

  • - Yeah, essentially internet stocks.

  • Although, even companies likes Sysco were--

  • - The technology stocks are still

  • a good fraction of the market.

  • - If prices can be off,

  • you know, Fischer Black said

  • he defined and efficient market

  • as prices within a factor of two.

  • - Well, Fischer said lots of crazy things, though.

  • (laughter)

  • - So that's my definition of market efficiency

  • and, you know, I have a Chicago Nobel Prize winner

  • I'm resting on,

  • During those days, a lot of our MBA students were quitting

  • after their first year to go out and make their billion

  • and most of them didn't.

  • And the same is true for the housing market.

  • So, I think these are important questions that

  • are not just academic disputes

  • and they'll be very important

  • in trying to understand the way the global economy works.

  • Now, I'm not saying we can recognize them

  • when they're happening, although, I'm working on that,

  • but I do think that

  • we can have a pretty good hunch

  • and that solving that,

  • a bubble detection committee

  • would be highly useful

  • if it were reliable and we're not there yet

  • and just saying it's impossible, I think--

  • - I don't think it's impossible, I'm just saying (mumbles).

  • - Then, we can agree on it's hard to tell

  • except for my cute anecdotes like CUBA.

  • - In general, it would be very useful to what extent

  • all economic outcomes are due to

  • rational or irrational into place,

  • we don't really know that, I don't think (mumbles)

  • That would improve everybody's lives,

  • more understanding is better than less understand.

  • - Okay, on that note, our time is up,

  • this has been a fascinating discussion

  • and maybe we can do it again

  • when you have come out with your bubble research,

  • look forward to that.

  • Now, thanks to our panel, Eugene Fama and Richard Thaler.

  • For more research, analysis, and commentary,

  • visit us online at review.chicagobooth.edu

  • and join us again next time for another Big Question.

  • Goodbye.

  • (gentle piano melody)

(instrumental piano music)

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B1 中級

市場は効率的か? (Are markets efficient?)

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    陳韋達 に公開 2021 年 01 月 14 日
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