Gene Fama on Econtalk

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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tms
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Gene Fama on Econtalk

Post by tms »

Released this morning, here is an interview with Gene Fama on the weekly podcast Econtalk. The the first 15 minutes he discusses the efficient market theory and its implications for investors In the rest of the interview, he discusses his unconventional view of the financial crisis, as well as his views on monetary and fiscal policy (including stimulus and bailouts).

http://www.econtalk.org/archives/2012/0 ... nance.html
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kramer
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Re: Gene Fama on Econtalk

Post by kramer »

Thanks! EconTalk is actually my favorite podcast.
jginseattle
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Re: Gene Fama on Econtalk

Post by jginseattle »

Yes, thanks for posting this interview. I'm listening as I type this.
Lumpr
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Re: Gene Fama on Econtalk

Post by Lumpr »

Econ Talk is a great podcast. It has been really interesting listening to the conversations through the financial crisis and beyond.
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tms
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Re: Gene Fama on Econtalk

Post by tms »

I am an Econtalk addict. In the last 15 months or so, I have listened to more than 200 episodes.
NoiseTrader
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Re: Gene Fama on Econtalk

Post by NoiseTrader »

[personal attack removed by Mod] I saw [Fama] say somewhere that he thought the recent recession must have started before the meltdown in asset prices starting summer 2007. This is because in an efficient market you can't have a price crash being the cause of a recession; it has to be that the recession causes the crash. How he can believe this is anyone's guess.
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tms
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Re: Gene Fama on Econtalk

Post by tms »

His argument is that the only thing that explains a drop in all asset prices - real estate, stocks, commodities - is a recession. The best argument against this is probably the timing.
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wbond
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Re: Gene Fama on Econtalk

Post by wbond »

His argument, actually, is that he does not know, but that you can make just as strong an argument regarding all assets dropping in a recession. The argument he makes is about how difficult it is to rigorously determine causality in marcoeconomics. It's always helpful to be skeptical about how we know what we know.
ladders11
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Re: Gene Fama on Econtalk

Post by ladders11 »

Fama has done important work but he is certainly dogmatic.

If you bought a sandwich, Fama would say that the money was already out of your wallet, the minute you got hungry.
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Liquid
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Re: Gene Fama on Econtalk

Post by Liquid »

Fascinating discussion, thanks for sharing. Of note though, I do not agree that "I don't know" is a compelling alternative theory.
Sulvar
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Re: Gene Fama on Econtalk

Post by Sulvar »

Fama approaches almost everything from an efficient market perspective. This is an interesting, and different, lens at which to look at events. I found his thoughts were eye opening and thought provoking.

I thought that his comments regarding the housing collapse / bubble were very interesting. This exchange in particular:
I think people see bubbles with 20-20 hindsight. The term has lost its meaning. It used to mean something that had a more or less predictable ending. Now people use it to mean a big swing in prices, that after the fact is wrong. But all prices changes after the fact are wrong. Because new information comes out that makes what people thought two minutes ago wrong two minutes later. Housing bubble--if you think there was a housing bubble, there might have been; if you had predicted it, that would be fine; but the reality is, all markets did the same thing at the same time. So you have to really face that fact that if you think it was a housing bubble, it was a stock price bubble, it was a corporate bond bubble, it was a commodities bubble. Are economists really willing to live with a world where there are bubbles in everything at the same time?
Fama then goes on to say that after the fact the rhetoric takes on a life of its own. Books and articles are all written about how the housing bubble caused everything. This is repeated so many times, that is almost seems as if it must be true.
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bob90245
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Re: Gene Fama on Econtalk

Post by bob90245 »

Sulvar wrote:Fama approaches almost everything from an efficient market perspective. This is an interesting, and different, lens at which to look at events. I found his thoughts were eye opening and thought provoking.

I thought that his comments regarding the housing collapse / bubble were very interesting. This exchange in particular:
I think people see bubbles with 20-20 hindsight. The term has lost its meaning. It used to mean something that had a more or less predictable ending. Now people use it to mean a big swing in prices, that after the fact is wrong. But all prices changes after the fact are wrong. Because new information comes out that makes what people thought two minutes ago wrong two minutes later. Housing bubble--if you think there was a housing bubble, there might have been; if you had predicted it, that would be fine; but the reality is, all markets did the same thing at the same time. So you have to really face that fact that if you think it was a housing bubble, it was a stock price bubble, it was a corporate bond bubble, it was a commodities bubble. Are economists really willing to live with a world where there are bubbles in everything at the same time?
Fama then goes on to say that after the fact the rhetoric takes on a life of its own. Books and articles are all written about how the housing bubble caused everything. This is repeated so many times, that is almost seems as if it must be true.
The truth is that EMH does not exclude the possibility of bubbles occurring. Otherwise, why would Burton Malkiel go through all the trouble detailing the many bubbles in his book A Random Walk Down Wall Street?

I don't get Fama's explanation that the term "bubbles" has lost its meaning... :?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
ladders11
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Re: Gene Fama on Econtalk

Post by ladders11 »

Sulvar wrote:Fama approaches almost everything from an efficient market perspective. This is an interesting, and different, lens at which to look at events. I found his thoughts were eye opening and thought provoking.

I thought that his comments regarding the housing collapse / bubble were very interesting. This exchange in particular:
I think people see bubbles with 20-20 hindsight. The term has lost its meaning. It used to mean something that had a more or less predictable ending. Now people use it to mean a big swing in prices, that after the fact is wrong. But all prices changes after the fact are wrong. Because new information comes out that makes what people thought two minutes ago wrong two minutes later. Housing bubble--if you think there was a housing bubble, there might have been; if you had predicted it, that would be fine; but the reality is, all markets did the same thing at the same time. So you have to really face that fact that if you think it was a housing bubble, it was a stock price bubble, it was a corporate bond bubble, it was a commodities bubble. Are economists really willing to live with a world where there are bubbles in everything at the same time?
Fama then goes on to say that after the fact the rhetoric takes on a life of its own. Books and articles are all written about how the housing bubble caused everything. This is repeated so many times, that is almost seems as if it must be true.
Regarding something like the housing bubble, he seems to miss the fact that there was irrational behavior taking place, and it was being multiplied by the social network of housing transactions. My sense is that markets can be more irrational or less irrational, and when you have a strong social multiplier like in the housing market, the differences in the level of irrationality can be very large. When people identify the housing bubble, they're talking about a market oriented social phenomenon with an impact on people's lives.

Like a lot of defunct economic theories, Fama's efficient market concept comes pretty close to requiring rational actors and unchanging circumstances. This is a poor model of reality. If we want to know how markets work, we need to wade into the grey area and try to understand irrational behavior. It is always happening and always changing.
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