I'm not claiming to be an expert in the work of Eugene Fama, Lars Peter Hansen and Robert Shiller who won the Nobel prize for economics yesterday.
I am, however, well aware of the Fama's work on the efficient market hypothesis.
I am surprised he won: I think the efficient market hypothesis helped create the 2008 bubble and crash. It's maths and extraordinary assumptions contributed enormously to the aberrant behaviour of the banks that resulted in the crisis.
In that context I note a new spin on his work now in the FT, who say today that 'Fama's ideas have helped discredit the idea that masters of the financial universe should be richly rewarded for their stockpicking ability'.
I call that unseemly spin. Yes, the EMH says you can't beat the market. Maybe that's true. But no one listened pre 2008 and I don't think anyone is listening now. And that make's the spin decidedly unpalatable for a prize that indicates to me that economics is not moving on.
That conclusion is, however, I guess no surprise to anyone who reads this blog regularly.
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So you’re claiming that:
1. EMH helped to create the 2008 bubble and crash
and
2. No one listened to the EMH pre 2008 or now.
??
I am saying if EMH was right it was wrongly interpreted and insufficient effort was put into correcting it
And if it is right now no effort is being put into the consequences
And in that case what value is the EMH?
I’m surprised at how dismissive you are of a concept that shows ordinary investors that the returns from a low cost, diversified portfolio are on average higher than from paying fees to so called experts.
There is an entire industry built around the basic insight that you can’t beat the market – they’re called index funds. It’s hardly as if “no one listened”.
Unless, of course, you’re talking about the financial professionals that thought they *could* beat the market, and *did* get caught up in a bubble. In which case you can hardly claim that EMH caused the crisis.
You well know that the logic of the EMH was not applied for that purpose
Please stop feigning ignorance
Hmm – after a cursory seach using google I come up with the following:-
http://www.passionsaving.com/efficient-market-hypothesis.html
This makes interesting reading and I’m sure I could come up with much much more.
All of which won’t change my mind that EMH is bs!
When I saw this announcement yesterday, Richard, apart from not being at all surprised, I found myself wondering whether Dacre and the Daily Mail would somehow construe this to be yet more evidence of the liberal left bias that they claim grips this country and the EU more widely, and which the Mail are so committed to defending their readers from. After all, the Nobels do come out of that well known hotbed of rampant socialism, Sweden.
Of course, as a liberal leftie I would see it as yet more evidence of the neo-liberal hegemony that – least we forget – even grips many of those in the Nordic countries (Norway having just elected a right wing government). Then again, not being a Mail reader, I’m clearly deluded.
That’s the trouble with all us non-Mail readers
We’re all just so wrong
Apparently the full title is the Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel. It has no real connection to the initial impetus that set up the original prize but it has been co-opted by the Royal Swedish Academy of Sciences.
More fool them…
Co-opted by the bank, you mean! More corporate capture.
Simon: The Sveriges Riksbank is their central bank. Public authority. Not even corporate…
How exactly did the EMH affect the activities of banks ?
In the way they traded
“But no one listened pre 2008 and I don’t think anyone is listening now. ”
Very large numbers of people listened. It’s the entire foundation of index funds for example. Don’t try to stock pick because you can’t. Just be passively invested in the entire market.
Also worth noting what Shiller said about the crash. Specifically, the US housing crash. His point was that there was insufficient speculation because there were incomplete markets. The answer is therefore to have complete markets, ones that allow people to speculate on falling house prices. This will curb bubbles.
Now maybe that’s all neoliberalism: but they have just given the Nobel for it.
As ever you offer an explanation that entirely misses the point
I am sure you know it too
Maybe you can enlighten Tim as to what the point is, Richard. For the benefit of those reading this exchange too.
Insufficient speculation/?&^%$£$££££????????? Is this man on Planet Zogg!
Could be. But he’s also just been awarded the Nobel…..
So?
Do you think Krugman right for that reason?
I will be amused if you say yes
The scandals of the last few years gives ‘passively’ a hollow ring. Many elderly cautious investors were duped into putting life savings into risky investments by deliberate obfuscation. A near relation in their seventies was left with £2000 of an invested £20000 and after this mis-selling was brought to light, they were offered £400 for their troubles.
Rotten at and to the core.
Hmm…interest rate hedges mis-selling (swaps) is hitting the fan soon – the upside to this is that the fines/compensation paid out will circulate money and contribute to the economy-this is now the only way that banks create wealth distribution – to use Richard’s phrase du jour: ‘you couldn’t make it up.’
As someone who thinks that the financial industry is maybe 95% composed of con-men and hustlers, the EMH has a certain appeal, as it implies that the active fund managers are charlatans; no-one can consistently beat the market. But on the other hand, it also implies that anyone investing in an actively managed fund is completely irrational (assuming their goal is income maximisation) because they could achieve just as good an expected gross return on their investment with lower costs (and therefore higher net returns) if they were to move their funds from active management to an index tracker. But, if huge proportions of investors are irrational, there’s no reason for the Efficient Market Hypothesis (which relies on rational investors) to hold. And therefore the whole theory is built on a paradox – and hence unreliable.
“So?
Do you think Krugman right for that reason?
I will be amused if you say yes”
The specific work that Krugman got the Nobel for? International trade theory? The implications of network effects and economies of scale in it?
Sure I think Krugman’s right in that and the Nobel is indeed a validation of that research. No, the Nobel is not a validation of Krugman’s views on, say, the value of the Keynesian multiplier. That’s not what the Nobel was validating.
Just as Elinor Ostrom’s Nobel was a validation of her work on the commons problem, that there are indeed communal solutions which are neither legislative nor purely private property based but not a validation of whatever her views were on the same Keynesian multiplier.
One thing that is amusing is that Shiller’s part of the Nobel validates the idea that we need to have complete markets and this can and sometimes does mean that we need more speculation, not less. Which means that the Robin Hood Tax is definitely contra-indicated.
All you prove Tim is that there is a very powerful hegemony of thought in economics the subscription to which is a clear pre-condition of being given a Nobel prize.
If the hegemony of thought is wrong – as it is – the prize means little
Yes, notable east coast US economists included