Are markets efficient?
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- Опубликовано: 29 июн 2016
- review.chicagobooth.edu | Do market prices generally reflect all available information? Or are they prone to bubbles? On this episode of The Big Question, two members of the Chicago Booth faculty-Nobel laureates Eugene F. Fama and Richard H. Thaler-discuss how markets behave (and misbehave). Along the way they discuss value stocks versus growth stocks, the existence of economic bubbles, and the curious case of the CUBA Fund.
This is the most agreeable disagreement i ever saw
I don't think a lot of people understand how significant this debate is
True.
Totally
@@Han-rg4zt agree
@Jacob L I recommend you looking up on grossman stiglitz paradox to ans your question. At the end of the day, two of these need each other to co exist simply put.
La neta no te pregunté bro
Wow everyone's out watching McGregor vs. Mayweather... smh. THIS is the only fight I wanted to see XD
Shaurya Salwan because your smart
Ladies and Gentleman, we aare liiieeve from the Chicago University Arena. This iiis the moment you have all been waiting for. BudLight presents the title fight in the Finance 101 heavy weight division. Presenting first, the title defender, fighting out of the Rational Corner: Eugene Farma. He weights in at 10000 citations. And the challenger, in the behavioral corner: Richard Thaler, weighing in at around 8000 citations.
Leeetss get ready to ruuuummblleee!!!
Only stupid people watched the inevitable outcome of the fight.................stupider still, paid for it when it was on YouYube for free lol
i enjoy watching UFC. I also enjoy watching intellectual debate. nothing wrong with people like watching mcgregor vs mayweather. your ego wants people to think you’re smart, but instead ended up being ironically shallow.
I love Gene. To hear him talk about markets is like having the best wine. It's just superb.
I took Prof. Thaler's course at Booth. At that time, the course was called "Managerial Decision Making". I always wondered why not "Behavioral Economics". You have to admire the man. He had the nerve to go mostly on his own, stick with his guns when no one believed in the topic of behavioral economics, and make a whole field out of it. Much respect! For both Thaler and Fama.
We should learn how to have a discussion without screaming and getting upset from these two legends.
A kinda objectivity vs subjectivity debate... Loved the talk of these two geniuses as it inspires several dimensional perspectives to the Conjecture!
So great to get these two geniuses together.
One genius (Fama) and one dude desperately hoping the genius agrees with him...
@@Omar-et7sb Fama is no genius.
@@harmankardon478 I am sure that you, with your one crappy RUclips video profile as a random dude on the internet, are qualified to call Nobel Prize Winner Eugene Fama "no genius". Cool story bro.
Amazing video! Such a joy to listen to Fama and Thaler's arguments. Hope Chicago Booth Review keep uploading these amazing videos.
Eugene fama is a really humble man and I love him for it, very smart man and I like viewing the markets as efficient even if it’s not perfectly so
Very smart and incredibly, astoundingly dumb at the same time.
"Eugene fama is a really humble man" - I am sorry but have we watched the same video? With all respect to Fama - he is a little bit arrogant.
He is obviously not
humble? he's full of himself.
So I'm Fama's model if anywhere in an infinite timeframe the price of something is the same as some other time, that shows that there are no bubbles? How is this model of any value to anyone?
Amazing video. The intellectual battle between these two economics geniuses during the past 2-3 decades was amazing. Although I am siding with Thaler on market efficiency you can’t really not appreciate and admire Fama as one of the most prominent defenders of EMH.
I'm late to this but what was the killer argument for you?
I am always amazed by the level of discussions of people like nobel prize winners researchers. This is always fascinating to watch.
This is equivalent as the Batman vs Superman in Economics
Thaler: Tell me, does your model bleed? It will
A video for History ! a few months later, Mr Thaler was receiving the Nobel Prize. Who won the debate ? Both are great minds. YC France
What an informative debate between these two towering figures in the field of finance.
This was a pleasure to watch. Thank you.
Great discussion! And wonderful moderation by the way.
Thaler won Nobel in 2017 !!!
For myself, I believe market is efficient in long-term
And market is inefficient in short-term
The short-term can be referred to only one day,
or as long as 1 years, more than 10 years, or more
And the long-term is infinite period in the existence of the market
"To me, both Fama and Thaler are true"
IMHO you cannot believe both are true. Let me ask: what do you mean by "short-term inefficiency"? Do you mean random-noise deviation from "true" price, while the true price would have captured all information? Then you're on Fama's boat. Or do you mean there're systematic mispricing that one would be able to consistently identify, that is eventually corrected in the long term? In this case you're on Thaler's boat. Can't be both right even when you distinguish by long-short term.
Literally my own thoughts in words.
Unfortunately people don't live indefinitely and I don't think the afterlife has a socio-political or economic system so all these economic theories become pointless babble.
@@ozziemandias1002 this is just dumb on so many levels
@@cat-.- they could coexist, the grossman-stiglitz paradox puts it rightly, financial markets could only be efficient if there's incentive for active managers to make active trades, meaning profits above the cost of capital of doing research for active management, the issue would be if every single last one of active managers turn passive, then the market would not be efficient since there's nobody to do pricing on assets, there should be an equilibrium point between both skilled active managers and passive investors to meet at
37:00 is what you're looking for.
This debate has been on RUclips for over 4 years and less than 112,000 have viewed it, no wonder why the markets are irrational.
To my understanding this just proves how much we need an edge as investors because playing the market like everyone else just isn’t good enough. I've been quite unsure about investing in this current market and at the same time I feel it's the best time to get started on the market, what are your thoughts?
Since the crash, I've been in the red. I’m playing the long term game, so I'm not too worried but Jim Cramer mentioned there are still a lot of great opportunities, though stocks has been down a lot. I also heard news of a guy that made $250k from about $110k since the crash and I would really look to know how to go about this.
There are actually a lot of ways to make high yields in a crisis, but such trades are best done under the supervision of Financial advisor.
Thats true, I've been getting assisted by a FA for almost a year now, I started out with less than $200K and I'm just $19,000 short of half a million in profit.
@@kenanporubsky2122 Impressive can you share more info?
@@martingiavarini My advisor is ‘’Catherine Morrison Evans’’ she’s highly qualified and experienced in the financial market. She has extensive knowledge of portfolio diversity and is considered an expert in the field. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market
For the people who do not get the argument is, the two disagree mostly on interpretation and not of data. Fama wants a systematic way to show behavior while Thaler allows the inclusion of anecdotes and anomalies.
exactly if Fama can't build a quantitative model to prove something, he won't accept it
anecdotes can be really trick
Large scale human behavior is too complex to model. So Fama effectively cops out by saying well if you can't disprove EMH then it is fact, this is not scientific at all.
Till this day, this conversation debate is so important!
Fama is the GOAT
who's watching finance videos in 2020?
The way I like to put it is that markets are efficient. And when they become inefficient, market makers will, at some point, restore equilibrium. Hence, they are efficient.
Jim D. Well then that implies periods of inefficiency that may be long enough for market participants to identify and capitalize on. You just described the semi-strong form of efficiency, or what many deem to be the more practical interpretation of market efficiency, which suggests that sophisticated investors do have a benefit in identifying market efficiencies while most casual investors don’t (hence the argument that casual investors should stick to passive investing).
@@USASPORTSCARDS thank you
@@USASPORTSCARDSi get your point but I disagree. I wouldn't describe that scenario as semi-strong. OP was actually describing the Grossman-Stiglitz paradox, where markets go thru cycles of efficiency and inefficiency because investors will always correct any inefficiencies.
Semi-strong efficiency implies they wont go inefficient in the 1st place
@@armitageshanks2499 Yup, calling it semi-strong efficiency is at the very least extremely confusing as semi-strong EMH asserts that the market *is* efficient at all times, in the sense of reflecting all publically available information.
This was a good discussion
Some part of the answer at 21:00
Great video, a number of the most eminent market experts have been expressing their views on the severity of the impending economic downturn and the extent to which equities might plummet. This is because the economy is heading towards a recession and inflation is persistently above the Federal Reserve's 2% target. As I'm aiming to create a portfolio worth no less than $850,000 before I turn 60, I would appreciate any advice on potential investments.
There are many other interesting stocks in many industries that you might follow. You don't have to act on every forecast, so I'll suggest that you work with a financial advisor who can help you choose the best times to purchase and sell the shares or ETFs you want to acquire.
I've been in touch with a financial advisor ever since I started my business. Knowing today's culture The challenge is knowing when to purchase or sell when investing in trending stocks, which is pretty simple. On my portfolio, which has grown over $900k in a little over a year, my adviser chooses entry and exit orders.
@@martingiavarini Could you possibly recommend a trustworthy advisor you've consulted with?
renowned for her proficiency and expertise in the financial market, “Catherine Morrison Evans” my financial advisor, holds a broad understanding of portfolio diversification and is recognized as an authority in this domain.
Thank you so much for your helpful tip! I was able to verify the person and book a call session with her. She seems very proficient and I'm really grateful for your guidance
Great video! Thank you.
I’m here, from Brazil 🇧🇷, watching it because of Icaro de Carvalho’s recommendation. 🙏😅
Fama only starts looking at Thaler after 27:00, he was pretty tense before that. It changes after some jokes on both sides.
I admire with Fama.
Prices reflect all available information , no doubt about it . Chief among this information is that public resources ( Central Banks , Federal Reserve etc ) will always be there to externalize/socialize risk through QE. Liquidity and confidence crisis will always be averted and toxic stuff will always end in the "FOR-OF-BY-the Pople´s" porfolio .
I think the price and the price change is aslo an public information, which should be consider as an impact in efficient hypothesis
If the all the available information is priced in the asset prices, this doesn’t mean that the prices are correct in a sense that they price the asset properly. There's an element of randomness and unknown future that is never priced. The opposite argument assumes perfect determinism and we know that there's no such thing.
Is this automatically captioned?
Civil War: Team Fama Vs Team Thaler
8:30.
That's an interesting idea I haven't considered before. Risk aversion changes through time. What a great insight. Something to think about. But, the problem is that it implies that the intrinsic values of asset prices are a function of risk aversion. That doesn't make sense. The "correct" value of an asset is a function of its remaining future cash flows discounted at an an appropriate risk-adjusted rate, with the risk related to the competitiveness of the industry in which it operates, its position in the market, its leverage and various other factors specific to the nature of the business, not on your opinions or emotions.
Much like the laws of physics don't consider your feelings in determining the mechanics of the universe, the correct value of a business (for the most part) is objective, regardless of how risky you feel it is.
It is ironic that he uses this changing of risk aversion as an argument for market efficiency when it could be used to argue against it. It is this unreasonably quick reversal of risk aversion by the financial markets as a whole that can produce unrealistic valuations. That leaves opportunities to those who are more level headed. As Buffett would say: "Be fearful when others are greedy, but be greedy when others are fearful."
Interesting points. However, the required return IS a function of risk aversion. Suppose you believe that trade tensions may depress businesses and productivity growth. Suppose you're not alone in your thinking. This greater uncertainty surely will affect your, and collectively, everyone's, required return for equity investments. If you believe in the notion that the value of a business is the discounted present value of it's future free cash flows, and since your discount rate had indeed increased due to greater systematic uncertainty, surely collective risk aversion can affect asset prices. Cheers, -W
I was having the same question initially but when I reviewed how the CAPM came from, I understood that risk aversion itself can have an effect on the weights within a portfolio return and it is also an assumption that investors who are risk aversion should be rewarded excess returns when they bear the excess risks. So it is a prerequisite for the development of CAPM theory that built on indifferent curve.
Also, market efficient hypothesis is nothing to do with risk aversion. The modern finance theory is relevant with brown random walk and there is no parameter of risk aversion in the stochastic process.
The comments are spending more time talking about how smart the conversation is and how smart you guys must be for listening to it than the actual content of the conversation.
The funny thing is, if everyone thinks the market is efficient and only invests in index funds, the market will be very inefficient, but if everyone thinks the market is inefficient and picks stocks, there will be winners and losers, and the average of those two people will not outperform the person who simply buys index funds and drinks coffee.
Personally, I prefer to buy index funds and drink coffee while encouraging people to learn about stocks and do active investing😄
Si vous êtes arrivé ici grâce à la chaîne Club de Valeur, laissez votre pouce !
Price is never right, it's always changing. Constantly changing it's mind.
Wow this was quite entertaining like two smart friends just chatting
My conclusion:
1. Market is indeed efficient (in strongest form)
Occam razor or maximum entropy model, it really works
2. Don't read any behavior finance book, it is for leisure purpose only.
3. Eugene should be awarded twice. One for EMH and one for asset pricing models.
No one like EMH, as it would put a lot of people out of work.
@@dakotadak100 Future returns :)
Do you suggest that market participants are fully rational beings and interpret every piece of knowledge the same way? If this is the case why only Michael burry and handful of people interpreted the available knowledge in a different way than others?
@@stillakzo Exactly, why do people bother to go to college if they already know how?
How you can watch a video where the creator of the efficient market hypothesis says that markets are not always efficient (first thing he says - 2:30) and come away with the takeaway that markeds are indeed efficient in its strongest form is rather bizarre.
Fama is really brilliant
Love this
Why those that say that the market can't be beaten usually are the ones that invest in stocks individually and not ETFs?
Thing is there are some individual stocks that outperformed the market over the years. in hindsight, it's easy to determine that just by looking at charts. The real question is, can you pick those stocks?
So to answer your question, I think they just feel lucky or they "invest" some money that they don't really need, or they use it as means of entertainment (it's almost like gambling). These are the answers that come to mind to be honest.
Before I read about investing, and especially index fund investing, I had the perception of the typical stereotype of traders. You know that math and tech genius that sits in front of 10 monitors and keeps track of the price movements and just smashes his keyboard and makes a lot of money out of it.
So some people might want to live that fantasy or they just look up to warren buffet and think they can replicate what he did.
Eu sei que você veio aqui pelo Ícaro de Carvalho.
This is what happens when you play golf.
So it the market efficient? I came here for answer but this video makes me even more confused than before.
To a large extend yes, in particular in the sense that almost nobody can outperform the market average consistently. So investing in index funds makes sense. But sometimes prices go wrong, there are occational annomalies and their are times of overconfidence and times of panic, so diversifying your investment over time (such as bying a few shares each month over many years) makes sense, too. That is my conclusion based on reading the literature from Fama, Thaler, Shiller, Lo, Malkiel.
Confusion is a sign second stage insight. Google Dunning-Kruger to see what I mean ;)
Thats the answer you should get because its still a hypothesis, these guys are the leaders of a lot of this research and they don't really know for sure
@@gcgrabodan please explain how the traders in Jack Schwagers Market Wizards books have out performed the market? Their pnl has been verified. Some are multimillionaires. Thanks.
@@gcgrabodanidiot many beat the market long term it’s just mutual funds charge fees and it negates survivorship bias before fees and expenses 30-40 percent beat the market long term were is the efficient . Google hedge funds outperform s and p before fees and expenses . 2-20 . Markets are always beat it’s just funds charge high fees you people are just not educated .
Information yes, emotion no.
Let me give you an example. Suppose you could know for certain that Company A would grow by 10% every year for the next ten years, while Company B would grow by 2% over the next 10 years, and continue to pay a 5% dividend with a 2% annual raise. This is more information than we could possibly have. Would these two stocks be rationally priced?
I predict that would not be the case. Investors would still overpay for growth, and underpay for a steady existing business. The idea of getting more money in the future is more appealing than getting a boring but steady stream of income.
This is fucking GOLD.
Hi Mark.
Unless you are an insider. Invest in ETFs/Index funds.
Pena que não tem legendas em português
Are markets efficient? No. Never. No one ever has all the information. Is marriage efficient? No. No one ever tells their spouse everything and most people cheat and lie.
Jack, we're interested in using your comment on the Feedback page for an upcoming issue of Chicago Booth Review. Do you mind sending your name and town/city of residence to review@chicagobooth.edu so that we can properly attribute your quote?
Use it under "Anonymous".
Thats not really the point though, is it? The idea is that in a deep market information all the inefficanis are evend out.
For example, a very shallow market will be one marriage. If we were to judge the marriage as an idea we would come to the conclusion that either 0%, 50% or 100% of the spouses cheat, that would not be consistant with marriage in the real world, but over a pool of a million marriges (a deep, and therefore effeciant marriage market we have a much easier time extraction inforation about the market of marriages. That seems to be consistant with the world at least.
The EMH has different formulations. The "strong" formulation says that stock prices reflect all information, which is not always true, but the in my opinion the most interesting one is the "semi-strong" formulation, which states that stock prices reflect all publicly available information. What this means is that you won't be able to bear the market, not unless you have insider information and trade on it before it goes public.
Missed the point, it is about all "available" information. They made sure to mention that idea several times. It is public information, not all private information.
THIS IS UNBELIEVABLE FUNNY! Two BRILLIANT guys, really! But I'm used to physics where everything either IS or is NOT. In finance, NOTHING is really completely "solved". So interesting.
Well, then I guess you never head of quantum mechanics.
You should invite Warren Buffet to this debate
Wow
27:09 hahaha.
whats so funny
Why do financial advisors sell bonds, that are debts of companies asking others to pay off? Isn’t that inefficient management of a company?
Alguém d'ONM?
All models are wrong, however, it just tends to be the case that some are more useful than others, might I add, in a given CONTEXT.
고계투 때문에 본다? 따봉ㄱ
찾았다 한국인
Bottom line: market efficiency aficionados will be destined to match the market and people who realize that the market isn’t as efficient as theorized will either lose their shirt or make outsized returns.
In hindsight every price is wrong 🤔
Buying broad based index funds means believing the market is mostly efficient.
Buying across time by DCA means dealing with the less efficient part of the market with diversification through time.
DCA into a broad based index fund, and you take care of both.
I realise this comment is 3 years old, but I will just answer in case anyone else comes across it. So, the issue with DCA is it only works if the price of the stock/index fund that you are buying is bearish. Then it would mean that you are buying it at a discount. We know that the stock market as a whole is in an uptrend, so the DCA is rendered obsolete. Although, some times there are huge upward spikes in the price of a mutual fund for example, so if you invest in a broad based index fund then, like vanguard, you run the risk of buying all at once at a premium not at discount. Then again, no one can predict the market, so you're better off just buying and holding for good. So even if you get in on a premium price (relative to recent prices of course), you will just have to wait longer to see any profits, or at least unrealized profits.
@@ChiefFr3oon The inherent mechanism of DCA is "buying more at a discount" and "buy less at a premium," based on the assumption that" no one knows where the market will go,"so your concern is exactly addressed by DCA itself.
@@mp40girl I mean, it does make sense, in a way. Let's assume you inherited a lot of money out of the blue. now, you have one of two choices, assuming you're investing it all in the stock market. You either invest it all at once or DCAing. I'm guessing you will DCA. then how much are you going to invest each month for example? and if you see the market is going up then you will invest less and vice versa. Mind explaining more about it ?
@@ChiefFr3oon
Well the general rule of thumb is that if you have a lump sum, don't not DCA more than six months.
DCA doesn't mean taking less risks. It just means taking risks LATER. It's mostly a psychological need.
Statististcally, dumping it in all at once offers a higher chance of a better (than DCA) result, around 66% of of the time.
Psychologically, it is hard.
DCA means investing "the same amount of money" every time, regardless of market conditions, buying more shares when it's cheap and fewer shares when it's expensive. In DCA we don't invest less money when the market is high.
You can also use value averaging, buying to maintain a fixed value of your portfolio. When your porfolio goes down a certain amount, you buy however much assets to make up the difference. The fixed value is set by you based on your goals on different time periods. It offers a benchmark against which to measure if you invest more or less.
Whatever you do, just don't invest more or less based solely on human judgement and "observation". Emotions contaminate your decision all the time.
Statistically, this behavior mostly gives worse results.
Vim pelo Faria Lima Elevator.
It puzzles me how hard is for someone as bright as Fama to admit agreement in any point. I would say that when he says " risk aversion moves dramatically through time (8:48)" he is referring to what behavioralist study, and because they are not able to predict it does not mean their work is pointless. As far as I know geologist are not able to predict earthquakes and they keep studying them.
I think you are confusing contrarianism with precision. This is the very paragon of how science is transmitted,, the exchange of observed information. Fama is holding that exchange to the highest bar possible so that any possible new idea that could come out of this conversation will have come as a result of meeting that standard and not a less precise one. There is definite utility at play here and it is not "being argumentative" whatsoever. This is objective handling of what is so subjective about semantics.
The initial idea of rationality is good and useful for a lot in economics. Now, when you dig into the motivation behind the preferences, you may find how biases form our thought process. Fama seems too conservative to see the value of an emerging field who still can't put all the dots on the i's and cross the t's. He simply replies to everything as, well, it's all a matter of preferences. Ultimately... yes... but there surely exists preferences that makes you lose money for badly processing information.
No, but are close to efficient
How wonderful to have a hypothesis so obviously wrong and without any evidence but also cannot be disproven. My hypothesis is the completely random market hypothesis. Oh its not "perfectly" completely random but its "very" completely random. Disprove me.
There is a difference between data and information. Do the markets reflect all available information? yes! Has all data been processed into information? No! That is why Munger and Buffett can repeatedly do what they do. Fama and Shiller are describing the same thing. I have no problem reconciling the two in my mind. Bogle... Shiller and Fama have made we wealthier. I am unable to implement Munger and Buffett.
Vasco da old GOA. 🐟🐟🐟🐟 Joka
I mean it isnt efficient all the time but almost all the time
bingo
Mc Beth seven factor model.
27:30 8:36
Sharp ratio.
When people were saying, "just buy mortgage bonds, you can't lose," that is a prime example, of an entire society inefficiently pricing an asset.
For anyone on board with Fama's train of thought, please pay attention to all the times he says he can't prove something, can't explain something, uses bad logic, and also says, "no you're wrong, I'm right."
In any given case, the value of an asset can be approximated, assuming there are cash flows to be valued. The price will always be somewhere at, above, or below that value. The only time value investors would ideally want to buy, is when they're paying a price less than the value. With stocks, value goes up or down based on the underlying businesses' ability to produce its future cash stream.
It's a nice theory, but it's far from perfectly explaining every situation. It does explain well, what happens with a basket of stocks. Less so, with individual situations.
Here's an example: you can buy the Chinese company, Tencent, outright. You can also buy exposure to it through two other holdings; Prosus, and Naspers, both at different discounts to the value of Tencent (I.E. at one point if you were buying tencent for $1, you couldve also bought tencent for $0.68 with Naspers, and for $0.47 with Prosus.) The figures given in the example are more or less accurate. You definitely can't tell me markets are efficient all the time.
Also, Fama literally calls value stocks (stocks that are cheap) more risky. Paying less, to that guy is somehow more risky, and also yields higher returns, historically. That is some logic there...
There is no way that the market reflects all of the information available. Firstly not all individuals in the market are aware of all of the information, not all individuals understand how that information could affect the market and even if all individuals knew all the information available they could still interpret that information differently. The market reflects the average of each market players take on the information that they know, understand and interpret. That makes it extremely unpredictable and totally reliant on all available information. It also means it can not be completely efficient.
Ben Bernanke
2:03
Broadly and long term markets are efficient, short term or individual stocks...no way,
Schiller's.
Stanley Fisher Van DER Walls.
If the market wasnt efficient there would be no funds
$GME.. Just sayin'.
Edit: Added a dollar sign.
Still I Don't understand market efficiency 🙄 can anyone help me to understand?
Think of yourself as a participant in the market like the stock market. You are part of the market that includes other shareholders like brokers, pension funds, banks, mom and dad investors, fund and asset managers, traders, government entities and institutional investors.
Now think about how you all interact on the information you have about a company you own as shareholders. A share market for the sake of simplicity tends to look forward in terms of how you would value asset prices. Its a pretty dynamic environment and when you think about how quickly information gets disseminated to all the different participants is what I would view as market efficiency.
When you have access to this information you as a participant forms an opinion as to what your shareholding is worth. In other words a battle of opinions with all information available at the time to as many participants as possible. When you think how much information is out there and how quickly it travels ie internet, newswires, market prices on the stock exchange will give you a sense of what market efficiency is and how quickly people form opinions in real time. You also have to understand that the share market is forward looking. In other words how does information affect the stock price now and in the near, middle, long term future.
Market prices are Always wrong in the sense that they present a biased view of the future.
These EMH guys are sole argument is that ... "well you can't disprove it so it must be true". Nope.
I think it was munger that said they are too smart for their own good. Eugene calls himself an economist, not an investor.
Programão de sexta com a cremosa...
Oil companies in India were out of taste for decades. Now these are in great demand. Have a look at the prices of BPCL, IOC,HPCL. These are Fortune 500 companies from India. Have a look at 5 years graph 2011-2016
23:50
Thaler's is probably right too, but Fama beats him hands down. Thaler provides no good evidence that Fama is wrong.
Fama's argument that risk preference change is a massive cop-out that would make efficient markets true by definition.
Fama's idea that value vs growth is a matter of taste is odd. Professional money managers wants low variance return, at least a fairly large portion of them. I think it is more some psychological limitations with the money managers.
Fama's point to kick out all PhD students in Finance that just searches for anomalies is funny.
I also find Thalers rambling annoying. Fama is so efficient in his speech. Impressive.
I don't think the taste argument was that odd to be honest. If you prefer to buy $100 worth of growth stocks over $100 worth of value stocks then it's a quirky little irrationality, sure, but one that makes no practical difference in pricing. However, if you prefer to buy $90 worth of growth stocks over $100 worth of value stocks then you're dealing with an arbitrage as Fama said, but in that case you'd have to point to me to empyrical evidence that such arbitrages can be systematically found in the market, which I don't think there is.
I agree with your point about changes in risk preference though.
Thaler doesn't have to provide evidence that Fama is wrong. It's up to Fama to prove his Hypothesis.
Can someone give me more clarification about market efficiency?
What is market efficiency?
Fama, E. F. (1998). Market efficiency, long-term returns, and behavioral finance. Journal of financial economics, 49(3), 283-306.
What Thaler to me seems to disregard is that an economic agent acting on the basis of greater fool theory is acting just as rationally and just as based on all available information (e.g. the conviction of the economic actor, based on past events, that there will be people buying X at Y price). In this light, his CUBA fund example is actually an argument for the efficient market hypothesis: you don't stop being a rational economic actor just because you are not making your decision on fundamental analysis (stock price deviating from NAV of the fund, home prices booming etc.).
The dude that buys the top made a bad economic decision, but bad decisions are rational too, not to mention that the market corrects later.
Well said. It seems as though Thaler and Fama are in some way agreeing on EMH. It's just the semantics of whether you consider people bidding up bubbles as rational or not.
If you call all behavior rational, than all people do is rational. They are just engaging in activities that their preference orderings ask for. What behavioral economists do is not to search for irrationalities in the sense of violating preference orderings, but in the sense of understanding how the preference formation can be biased in a certain way that produces sustained anomalies. Not for eternity, but for a reasonable amount of time. That's it.
Who else is here from the University of Aberdeen? 😁
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Obama, Trump, Kamala Harris will be elected in 2024.