Honoring the Men Whom Money Managers Have Ignored: The Nobel Prize
On Monday, the Nobel Committee awarded this year’s prize in economics to Eugene Fama, Robert Shiller, and Lars Peter Hansen. We owe Mr. Hansen a debt of gratitude because he gave economists the quantitative tools to explore the nature of the financial markets. Mr. Fama, in turn, set off a decades long search for factors that might explain the performance of the markets and predict their future course. Much as Mr. Fama predicted in the 1960s, there isn’t a magic formula that enables investors to outperform the market. Mr. Shiller helped to launch behavioral economics as a way of explaining the twists and turns of the financial markets. Mr. Shiller showed that economic fundamentals alone cannot explain securities prices.
In announcing the award, the Nobel Committee contrasted Mr. Fama’s adherence to market efficiency to Mr. Shiller’s belief in inefficiency and market bubbles. The committee positioned Fama and Shiller as polar opposites. While congratulating Mr. Shiller for winning this year’s prize, Mr. Fama restated his fundamental disagreement with Mr. Shiller’s basic thesis.
I think there’s a much bigger message in this year’s award. Despite the fact that Messrs. Fama and Shiller and their respective views form much of the core of the investment curriculum in business schools, most financial practitioners have ignored their essential messages. On the one hand, nearly all money managers madly trade the daily twists and turns of the market, thereby ignoring Mr. Fama’s irrefutable lessons about the market’s day-to-day efficiency. On the other hand, money managers have disregarded Mr. Shiller’s admonitions and chased fundamentally unsupportable investments during periods of irrational valuations such as the Internet and housing bubbles.
After teaching Fama and Shiller at UNC’s Kenan Flager School of Business, I became more humble whenever I faced the financial markets. The forces driving our markets are extremely complex and resistant to any one formula. Despite all the academic research and the sophisticated models built by money managers, our understanding of the financial markets remains elementary. Nonetheless, several generations of money managers have emerged from business schools and then completely ignored the sound lessons expounded by this year’s Nobel Prize winners.
Ironically, money managers haven’t paid much of a price for disregarding Fama and Shiller. As I’ve pointed over and over again, money managers have become wealthy ignoring Fama and Shiller, and you and I have paid the price.