Monday, October 14, 2013

Three Americans Awarded Nobel Prize in Economics

The Americans Eugene Fama, Lars Peter Hansen and Robert Shiller have won the Nobel Memorial Prize in Economic Sciences.

The three economists were awarded the prize for their mathematical modeling which attempts to forecast asset prices, especially stock prices.

According to the Nobel committee:
Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.

If prices are nearly impossible to predict over days or weeks, then shouldn’t they be even harder to predict over several years? The answer is no, as Robert Shiller discovered in the early 1980s. He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.
These models are pretty much complex nonsense, at their best doing little but mirroring stock market activity, rather than forecasting it. Any half way decent trader understands Shiller's point with regard to the corporate dividend price ratio, it is really a spin-off of the price-earnings ratio, which was published daily for stocks in the WSJ for decades before Shiller's"discovery"

It should also be noted that Shiller is part of the "Yale school" of Keynesian economic thinking, which is from where Federal Reserve chair nominee Janet Yellen hails, and thus suggests the Nobel committee's continued infatuation with the Obama administration.

Here's Frank Shostak on some the problems with Shiller thinking:
In his book Irrational Exuberance, Robert Shiller, a professor of economics at Yale, attributes the observed stock market mania to investor’s psychology. Shiller believes that stock market players are driven by impulse and herd behavior. The attempt to explain the present stock market behavior by means of these factors presents investors as automatons who react mechanically. 
This view is completely misguided. Investor’s actions, like that of all market actors, are conscious and purposeful. It is not some mysterious impulse or herd behaviour that causes investors to generate massive rises in prices that are out of touch with equilibrium, or fundamentals, but rather investors' conscious actions.[...]contrary to Shiller, the present sharp deviation of stock prices from their fundamentals is the result of loose monetary policies of the US central bank, not a failure of human psychology.

As for Fama, he is most often thought of as the father of the efficient-market hypothesis. See Robert Murphy on Fama's delusions, here.


  1. Just shows that Nobel prizes are a joke. They give "peace" prizes to guys who drone people and blow up countries with cruise missiles. Nearly EVERYONE that does market analytics knows this. Short term is harder than long term. In fact, forecasting stock prices out 3 months using monthly data profitably is not very hard and if you pentile the stocks you can make a pretty good portfolio. I've done this with a big advisory house very successfully.

  2. Oh, and one can do this even though Robert is correct in that the parameters of models are NOT constant. They change. This is called a "non-stationary system" and you must accommodate for that else your models WILL fail.

  3. Disappointed that Gary North was passed up again this year. When will he receive the recognition he deserves for his masterpiece "Honest Money: The Biblical Blueprint for Money and Banking?"

    Mathematical modeling is complex nonsense. It all comes down to three Biblical laws:

    (1) monetary debasement is wrong (Isaiah 1:22);
    (2) multiple indebtedness, which is the basis of fractional reserve banking, must not be allowed (Exodus 22:26) ;
    (3) weights and measures must not be tampered with (Lev. 19:36).