Podcast Summary
Nobel Prize-winning economists' contrasting views on financial bubbles: Two Nobel laureates, Fama and Schiller, held opposing views on market efficiencies and financial bubbles. While Fama saw markets as logical, Schiller found evidence of bubbles in historical data. Understanding their perspectives is crucial for investors navigating the market.
Two Nobel Prize-winning economists, Eugene Fama and Robert Schiller, had contrasting views on financial bubbles. While Fama believed that markets are efficient and that bubbles are a myth, Schiller saw evidence of bubbles in historical data. Their disagreement highlights the ongoing debate in economics about whether markets are driven by logic or emotions. This discussion comes as the US stock market and home prices reach new highs, making it a relevant time to reflect on the insights from Fama and Schiller. For investors looking to navigate the market, it's essential to consider both perspectives and stay informed about emerging trends. GlobalX ETFs can help you explore various investment strategies, including those that track emerging trends, to help you make informed decisions.
The Rational Market vs. Financial Bubbles Debate: Economists debate whether markets are rational or prone to bubbles, with Fama believing in collective wisdom and Shiller warning of irrational exuberance
While some economists, like Eugene Fama, believe that markets are rational and prices always reflect collective wisdom, others, like Robert Shiller, are more skeptical and believe in the existence of financial bubbles. Fama argues that prices change due to new information, while Shiller, who co-authored the book "Irrational Exuberance," defines a bubble as a time of rapidly increasing prices and people telling stories to justify them. Shiller himself admits that the concept of a bubble is not well-defined and has written his own definition, comparing it to a mental illness with a list of symptoms. For instance, during the housing boom, there were rapidly increasing prices and justifications for them, such as the belief that real estate prices would continue to rise indefinitely. However, the definition and existence of bubbles remain a topic of debate among economists.
Financial bubbles driven by emotional impulses and media hype: Financial bubbles, fueled by emotional impulses and media hype, can lead investors to disregard common sense and invest irrationally, but not all bubbles result in crashes
The concept of financial bubbles, once considered heresy in economics, is now widely accepted. According to Robert Shiller, bubbles are driven by emotional impulses fueled by stories and media hype, leading people to disregard common sense and invest irrationally. However, not all bubbles result in crashes. For instance, Google's rapid price increase over the past decade, despite being described as a bubble by some, has not yet led to a crash. Predicting a bubble's demise reliably is challenging, as Thomas Sargent argues. Despite the potential risks, the allure of high returns and the fear of missing out continue to entice investors into bubbles.
Is it possible to predict stock market bubbles?: Nobel Laureates Eugene Fama and Robert Shiller hold opposing views on predicting stock market bubbles. Fama argues markets work properly, prices reflect all relevant info, while Shiller believes it's possible to have confidence in an upcoming bubble based on historical trends.
According to Eugene Fama, Nobel Laureate in Economics, bubbles are not predictable and do not exist in the sense that one cannot reliably predict when they will burst. Fama argues that if markets are working properly, all relevant information should be reflected in prices. Therefore, if someone believes that prices are going to go down, they should act on that belief by selling, which would cause the prices to adjust accordingly. Robert Shiller, another Nobel Laureate, disagrees to some extent. He believes that while it may not be possible to predict the exact date of a bubble burst, it is possible to have a high degree of confidence that one is coming. Shiller famously identified bubbles in the stock market in the late 1990s and in the housing market in the 2000s, both of which eventually did burst. However, it is important to note that Shiller's predictions were based on historical trends and analysis, not on any insider information or ability to predict the future. Overall, the debate highlights the complexities and uncertainties of financial markets and the limitations of human ability to predict their behavior.
The Debate Over Financial Bubbles: Fama vs. Shiller: Fama challenges the bubble believers to predict multiple bubbles reliably, questioning their past successes and the statistical significance of identifying just one or two.
There is ongoing debate between those who believe in the existence of financial bubbles and those, like Fama, who argue that market movements are largely driven by random chance. Fama, a renowned economist, has studied market predictions extensively and asserts that there is little evidence of consistent market prediction success. He suggests that some individuals who seem to predict bubbles correctly are often anointed by the media and their past successes are not thoroughly scrutinized for potential luck factors. To prove the existence of bubbles, Fama challenges Robert Shiller and others to predict multiple bubbles reliably, suggesting that predicting just one or two is not statistically significant. This challenge sets the stage for further exploration and potential resolution of this long-standing debate.
Nobel Laureates Robert Shiller and Eugene Fama: Different Perspectives on Economic Bubbles: Despite sharing the Nobel Prize, economists Robert Shiller and Eugene Fama have contrasting views on economic bubbles, with Shiller believing they're predictable and preventable, and Fama thinking they're unpredictable and unpreventable.
Interpretation and understanding of economic phenomena, such as bubbles, are subjective and can lead to differing perspectives. Economists Robert Shiller and Eugene Fama, despite agreeing on certain facts, have contrasting interpretations. While Shiller believes bubbles are predictable and can be prevented, Fama thinks they are unpredictable and impossible to prevent. The Nobel Prize in economics differs from sciences like physics because discoveries and consensus are harder to achieve. Shiller and Fama, despite their contrasting views, share the Nobel Prize with grace and a love for the evolving nature of economics. The inherent complexity and lack of controlled experiments in economics make it an ongoing argument, as acknowledged by the Nobel Committee in their praise of the two laureates.
Nobel Laureates Eugene Fama and Robert Shiller Discuss Economics: Nobel Prize in Economics sparks public fascination, NPR's Planet Money interviews Fama and Shiller, listeners encouraged to engage through email and social media, economic discussions remain relevant in daily life
The Nobel Prize in Economics has sparked significant interest and conversation around important financial concepts. For David Kestenbaum and Robert Smith of NPR's Planet Money, interviewing Nobel Laureates Eugene Fama and Robert Shiller was a first, indicating the growing public fascination with economic ideas. Kestenbaum shared an amusing anecdote about an earlier interview with Fama that didn't make it to air. This episode, which originally aired in 2013, was produced by Darius Raffion and engineered by Gilly Moon, with supervision from Alex Goldmark. The team encourages listeners to engage with them through email and social media, including TikTok, where they share unique and insightful content. Overall, this conversation highlights the enduring relevance and importance of economic discussions in our daily lives.
