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- 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.
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.
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.
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.
- 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 Fama–French 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.
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.
- 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.
- 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
and join us again next time for another Big Question.
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Are markets efficient?

565 Folder Collection
陳韋達 published on October 14, 2016
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