Fama, French and Thaler

I’m teaching finance this quarter. Thumbing through the textbook section on “anomalies” and behavior finance I see cites to lots of papers by these three guys.

These three are my guess for the Nobel. If I didn’t misread the “depression” contract on intrade (I didn’t catch that they summed annualized quarterly numbers to define a depression), I’d have money in that account to bet on these guys.

BTW, I can’t believe Barro hasn’t won.

UPDATE: Cheerleading for EMH. Cochrane’s introduction to Fama gives an argument for why these three folks deserve the prize.

7 thoughts on “Fama, French and Thaler”

  1. If Fama gets the Nobel, it will be far more controversial than Obama’s because of EMH. Watch for De Long and Krugman to go bananas.

  2. Dudes, why isn’t anyone noticing the b.s. in the “but they pushed EMH” argument?!

    Was their work a contribution to our understanding of the economy? Yes/No. — Lots of people got prizes for stuff that’s now (and at the time of their awarding) pretty much obsolete. That’s not the point.

    Without EMH to sh*t on, there would be no literature to document deviations from it :-)

  3. “Your first claim is a stretch; controversial among economists, unnoticed by everyone else.”

    If Fama wins, I’d run the headline “Guy Who Doesn’t Believe in Late 90s Tech Bubble Wins Nobel Prize for Not Believing in Stock Bubbles.” Given the current economy, I think that would situate it perfectly fine for a mass audience. And also be The Onion-ish enough.

    As for business/finance professionals, I’m not sure. My suspicion is, and there’s some selection bias, is that you’d have a collective groin. Fama is a good representative of an economist showing up to business and making giant claims with hand-waives – and who still hasn’t delivered the goods with explaining momentum; for every CFO whose had to deal with a 22 year old econ major explaining that “MM says capital structure doesn’t matter so what’s the point of what you do” (teach those children finance well, Will), you get the same with equities prices and Fama. Some people like that, some don’t; more don’t right now at this time.

    My hope is, if it goes to Fama, it is teamed with Thaler and one of the Harvard/MIT econometrics guys (Lo, Campbell, separately Schleifer though he’s too young).

  4. Gabriel, I think its the timing that’s funny not the fact that the dude deserves it. Mike, Thaler was my behavioral finance beard… I know next to nothing about the field (which hopefully changes soon because I’m going to lecture on it in a week or so!) and Thaler is the only guy I know.

    In general, I’ve heard of a bunch of results from behavioral finance, but that’s about it. I’ve never seen a textbook treatment and my general impression is that they find “anomalies” that the EMH types quickly rationalize. Does anyone do a good job of explaining how it all fits together?

  5. Yes. Efficient Markets -> CAPM, which has that equities are compensated for their correlation with systematic risk (beta). Fama was the proponent for this in the 70s.

    In 1992, Fama and French showed that beta is actually very weak, weaker than thought, and that market cap (size) and book-to-market explained earnings. To keep EMH going, they said that these must compensate for a risk-factor we can’t observe or model yet. This lead to waves of statistical findings of ‘anomalies’ – and then a debate; is the anomaly the result of behavioral quirks among aggregates of investors? something that is too (uncompensated) risky to try and get on the other side of (limits to arbitrage)? Or, as Fama would say, a risk factor we just don’t know or model yet?

    My favorite anomalies, fwiw – options traders can’t pinpoint vol movements; equities traders don’t look beyond a 3-5 year horizon. The stuff around post-earnings drift is also important.

    I think a story about Limits to Arbitrage brings it together well when teamed with behavioral quirks, though formal models are not necessarily going to be easy. This guy’s webpage has a lot of the best papers in this literature; check out Shiller or the Cochrane 1999 papers (he’s brilliant when not pretending to be a macro guy!) if ya’ll interested; those fit it together well.

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