Shiller: 'Efficient' Markets? Don't Bet the Ranch on It

Monday, 28 Oct 2013 07:55 PM

By Dan Weil

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Nobel laureate economist Robert Shiller has great respect for fellow Nobel laureate Eugene Fama, but not for Fama's efficient-market theory.

The theory holds that prices of financial assets are automatically correct, because they incorporate all the information presently available to investors.

"If the theory said nothing more than that it is unlikely that the average amateur investor can get rich quickly by trading in the markets based on publicly available information, the theory would be spot on," Shiller writes in The New York Times.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

But the theory has been used to argue that "markets reflect a wisdom that transcends the best understanding of even the top professionals, and that it is hopeless for an ordinary mortal, even with a lifetime of work and preparation, to question pricing," he says.

This view has gained great currency among economists, Shiller says. "And its implications are dangerous," he maintains.

"It is a substantial reason for the economic crisis we have been stuck in for the past five years, for it led authorities in the United States and elsewhere to be complacent about asset mispricing, about growing leverage in financial markets and about the instability of the global system."

Markets are imperfect and need regulation, Shiller asserts.

Many commentators were struck that economists with views as divergent as Shiller and Fama both received Nobel prizes this year.

"It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not," writes Financial Times columnist John Kay.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Related Stories:

Faber: US Stocks May Plunge 20 Percent or More by Year's End

Economist Rupkey: Fed's Low Rates 'Distorting the Market'

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