More on Fama and Shiller – Efficient versus Inefficient Markets

Eugene Fama and Robert Shiller were two of the three recipients of the 2013 Nobel for Economic Science. That prompted a lot of people to say that the prize committee was having some fun by naming two people with opposing theories. Fama was an early champion of efficient markets, while Shiller contends markets can be irrational at times. I’ve argued that there isn’t all that much space between the two as some commentators have said.

Here are a couple of interesting followups. There’s a New York Times interview with Eugene Fama that includes his comparison of his work to Shiller’s. And here’s an article written by Shiller giving his view of the differences between him and his co-winners. The pieces together are both entertaining and enlightening.

Shiller and Thaler helped to found the field of behavioral finance to help explain a lot of these anomalies. Where’s the difference between the two views, as you see it?

If I were to characterize what differentiates me from Shiller or Thaler, it’s basically we agree on the facts — there is variation in expected returns, which leads to some predictability in returns. Where we disagree is whether it’s rational or irrational. And there’s nothing in the available evidence that allows one to really settle that in a convincing way. The stuff that both Shiller and I have done has been very illuminating in terms of the behavior of returns. The interpretation of that is open for reasonable disagreement.

I think all points of view should get a full airing, and that’s why I’m thrilled to get the prize with Shiller.