Recently, the NPR’s Planet Money Podcast spoke with two of the three economists who won the 2013 Nobel Memorial Prize: Eugene Fama and Robert Shiller. Fama and Shiller are an odd combination as they represent very different philosophical positions in the study of economics. Shiller is a proponent of behavior economics, whereas Fama ascribes to an efficient-market theory. This episode which discusses economic bubbles is an example of this debate. As the Planet Money team explain, “Shiller is probably the most famous analyst of bubbles; Fama is probably the most famous skeptic of bubbles.”
Here is a description and excerpt from the interview:
On today’s show, we talk to two of the three guys who won this year’s Nobel Memorial Prize in economics: Eugene Fama and Robert Shiller.
As we and everybody else pointed out when the award was announced, these two are a bit of an odd couple. Shiller is probably the most famous analyst of bubbles; Fama is probably the most famous skeptic of bubbles.
Here are a few quotes from our conversations with Fama and Shiller.
Fama:
The word “bubble” drives me nuts, frankly, because I don’t think there’s anything in the statistical evidence that says anybody can reliably predict when prices go down. So if you interpret the word “bubble” to mean I can predict when prices are going to go down, you can’t do it. …
I believe markets work. And if markets work those things shouldn’t be predictable. If I can predict that housing prices will go down, if the market’s working properly, they should go down now … If the market’s working properly the information should be in the prices.
In other words, Fama says, if stock prices get too high, then people should sell stocks, and the price should fall. Presto, no bubble.
But Shiller himself has predicted the two great bubbles of our time. As he told us:
You can have a fairly high degree of confidence. That’s what I felt in the stock market in late 1990s. I wrote the first edition of my book, “Irrational Exuberance,” then, because… and I was rushing to get it out. I told my publisher, Princeton, “Please get this out! Because I want this book out before the crash, not after.” And then again I felt that in the 2000s with housing bubble.
Fama:
So, what happens each time is the media goes in and finds somebody who predicted it. That person get’s anointed. You don’t go back and look at past predictions and see is this just luck.
So, was Shiller one of those people who was anointed by the media?
Oh yes. …
What would prove it to you that there were bubbles?
Empirical evidence.
Such as?
Well, that you could show me that you can predict when these things turn in some reliable way.
So what is your challenge to Robert Shiller? He should predict the next bubble?
[laugh] Right. Well, I don’t know. Not just the next one. You know, statistically reliability means more than two, really.
The next 10?
Well, the next 10 would be really convincing. Yeah then I’d be convinced.
We asked Shiller what he thought about this:
Fama says he would believe there were bubbles if you could predict ten of them in a row.
Yeah, but I don’t live that long. You know, these big bubbles are rare events that play out over years. They can go a long time.
If you lived long enough, do you think you could make good on Gene Fama’s request that you predict 10 bubbles in a row?
If I lived long enough, yeah.
You do think you could?
Uh. I think so. Yeah. I’m not the most self confident person.