Econintersect: This could have been one of the ten articles we list every day in one of our “What We Read Today Articles“. But that would have risked that fewer people might actually have followed through to read an exceptional summary of the apparent dichotomy of the Nobel Prize award shared by two opponents, Eugene Fama and Robert Shiller. A week ago Barry Ritholtz created in The Washington Post a brilliant analysis that made sense out of the apparent contradiction.
Ritholtz compared the early part of Eugene Fama’s career with the later part. In the 1960s Fama created the logical foundation upon which index investing has been developed. But then later in his career he extended the early insight into a realm of assumed probability distributions that in practice fail a small percentage of the time to produce what Nassim Nicholas Taleb has called “Black Swans“. The false assumptions about probability created a functional monster that destroyed fortunes over the years since the turn of the century.
After describing the successes of the younger Fama, Ritholtz points put that Shiller arrived on the scene in the following years to point out the shortcomings of the later errors by Fama involving the assumption of Gaussian distributions of market results, rational behavior in markets and asymmetry of information exchange. The view of the essay is that Shiller’s work arrived in time to save Fama the Younger from being dragged down by the missteps of Fama the Elder.
Read the column by Barry Ritholtz: How Shiller helped Fama win the Nobel Prize.
Note 1: This brief news story in no way should be taken to diminish the pioneering econometric work of the third awardee, Lars Peter Hansen. Hansen simply has not pressed the ideological buttons that Fama and Shiller have and he creates no contrast with either of the other two recipients in the way that they do with each other.
Note 2: Later work has extended that of Taleb’s masterpiece. Some of that work has been described by Clive Corcoran (a Global Economic Intersection contributor) in his 2013 book “Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today’s Macro Risk On / Risk Off Financial Environment“.
Note 3: Noah Smith has posted a view that has some very rough parallels to the Ritholtz column: “If Fama were Newton, would Shiller be Einstein?“.
