Sunday, October 27, 2013

Robert Shiller Comments On Winning Nobel Prize Along With Eugene Fama

There has been a lot of discussion about the award of Noble Prizes this year to two economists who have very different theories about the efficiency of markets.  Robert Shiller won the award for his approach to asset prizes which assumes that markets are often irrational.  Eugen Fama assumes that asset prices are always correct and markets are always efficient.  For Fama there is no such thing as an asset price bubble.  Shiller, on the other hand, predicted that housing prices were inflated and that the bubble was bound to burst. 

Shiller does not see any problem in the awarding of Nobel prizes to each of them.  He believes that one of the good things that can be derived from Fama's theory is that it is foolish for the average person to time the market or to make an effort at stock picking .  Few professional investors are able to consistently perform better than market indexes.  The average investor is better off purchasing stock indexes.  They will make fewer mistakes and they will avoid the high fees charged by wealth managers.  On the other hand, Fama's theory assumes that markets are efficient and that any effort to regulate markets would lead to less efficiency.  Alan Greenspan, and many other economists with faith in Fama's theory,  decided to deregulate the financial markets at great cost to the global economy.  Shiller believes that market are irrational and that it was a mistake to deregulate them.

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