Shiller vs. Fama vs. the Skeptics

Robert Shiller and Eugene Fama, sharing a stage for the first time since it was announced last month that they would share the 2013 Nobel Memorial Prize in Economic Science, sparred with languorous familiarity Tuesday about the efficiency of financial markets.

The electricity, somewhat surprisingly, came from some of the chemists and biologists who joined the two men on a stage at the House of Sweden in Washington for a discussion featuring all nine of the nation’s 2013 crop of Nobel laureates.

The sparks began to fly after Professor Fama responded to a question about the recent rise in stock prices by declaring that markets are efficient - “of course” - and that he could not predict what would happen next because that is impossible to predict.

“This is a good opportunity to congratulate Professor Fama at being one of the most successful at beating the market,” Professor Shiller said in a teasing response, referencing the success of the Fama-advised investment group Dimensional Fund Advisors.

Then Martin Karplus, a Harvard University chemist, interjected, “ “What understanding of the stock market do you really have?”

Economics - “if one wants to call it a science” - seemed unable to explain the oscillations of the market, he said.

“I see these fluctuations and they make zero sense to me,” Professor Karplus declared. “Maybe they make sense to you.”

Professor Fama dismissed the question as unsophisticated, declaring its premise “factually incorrect.”

The hard scientists, more amused than chastened, turned to mocking the economists.

“You’re asking about a very fundamental question, on what the nature of life is,” James Rothman, a professor of cell biology at Yale University and one of the three newly minted laureates in medicine, told one questioner. “I don’t think there’s anyone here â€" even the economists  - who would have an opinion on that for sure.”

Professor Karplus joined the fun. All three of the chemistry laureates are immigrants to the United States, and Professor Karplus said he believed that immigration was the basis of the country’s scientific pre-eminence.

“There’s no question in my mind - maybe the economists can prove me wrong - that the exodus from Europe started the present-day conditions in the United States where science is doing so well,” he said.

The basic dispute between Professors Fama and Shiller cropped up in an interesting and illuminating form later in the discussion, in response to a question about the impact of federal cuts on science funding.

After several of the hard scientists bemoaned the decline of funding, Professor Fama declared that scientists always wanted more funding, but that it might make more sense to rely on the private sector to fund science.

“The question is, ‘How much do you trust the public to make the right decisions and allocations?’” he said.

Professor Shiller rejoined that the government should raise taxes to double funding for science.

What does this have to do with their views about the efficiency of financial markets?

Professor Fama, in saying markets are efficient, means that we cannot predict future price movements because prices reflect all available information at any given time. Professor Shiller sees evidence that prices conform to patterns rooted in human behavior.

Their disagreement, more broadly, is about the ability to predict the future. Professor Fama has a basic distrust of the ability of people, or the governments they create, to anticipate needs and opportunities and to allocate resources efficiently.

In investing and in science, Professor Shiller sees both a need and an opportunity to do just that.