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A Refreshing Change of Pace

10/15/2013

During the national embarrassments that Congress creates ever more frequently, it is nice to read a little good news, such as three Americans winning this year’s Nobel Prize for Economics.  They were Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University.  Congratulations to each of them!

Although all three have increased our understanding of how asset prices are determined, it is also interesting that the two universities represent very different views of economics.  The University of Chicago is associated with the conservative view:  that government can only make an economy less efficient.  Indeed, their seminal work is called “the efficient market hypothesis.”  Detractors have joked that Professor Fama was walking across campus with a student, when the student saw a $20 bill laying on the ground.  He pointed it out to Professor Fama, who said there was no $20 bill laying there.  Seeing it with his own good eyes, the student asked Fama how could he deny the existence of what the student could see?  The professor explained that if the $20 bill was really laying there, somebody would have already picked it up, because the market is efficient.

All joking aside, the efficient market hypothesis gave birth to and propelled the index industry of mutual funds and ETFs.  Why pay somebody to pick stocks for you, when that was impossible.  If a stock was undervalued, somebody would have already bought it.

Professor Shiller of Yale, on the other hand, is a very different type of economist.  While he doesn’t argue undervalued stocks can be found, he does argue overvalued stocks can be avoided.  (Fama would argue stocks could not be overvalued, because investors would have already sold the stocks if they were overvalued.)  Shiller has done significant work in documenting “bubbles,” which theoretically is impossible if the markets were really efficient.  He clearly predicted “dot.com” stocks were overvalued and later predicted home prices were overvalued.  Last week, he said home prices are again showing some signs of being overvalued.  Shiller is a big supporter of Janice Yellen as the replacement for Ben Bernanke as Fed Chairman.  (He also does economic research with Yellen’s husband.)

Be it a “high five” or a glass of champagne, raise your hand today and be proud of being an American. Since the year 2000, Americans have won 21 out of 37 Nobel Prizes in physics, 18 out of 33 in medicine, 22 out of 33 in chemistry, and an incredible 27 out of 30 in economics.  Whoever said that America is in decline?

 Now, wasn’t that refreshing??

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