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badger comments on Open Thread, November 1 - 7, 2013 - Less Wrong Discussion
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Ugh. The prize was first and foremost in recognition of Fama, Shiller, and Hansen's empiricism in finance. In the sixties, Fama proposed a model of efficient markets, and it held up to testing. Later, both Fama, Shiller, and Hansen showed further tests didn't hold up. Their mutual conclusion: the efficient market hypothesis is mostly right, and while there is no short-term predictability based on publicly available information, there is some long-term predictability. Since the result is fairly messy, Fama and Shiller have differences about what they emphasize (and are both over-rhetorical in their emphasis). Does "mostly right" mean false or basically true?
What's causing the remaining lack of agreement, especially over bubbles? Lack of data. Shiller thinks bubbles exist, but are rare enough he can't solidly establish them, while Fama is unconvinced. Fama and Shiller have done path-breaking scientific work, even if the story about asset price fluctuation isn't 100% settled.
Mostly right means false. The hypothesis that securities markets are pretty darn efficient, and everybody goes through a broad range of ideas of inefficiencies that turn out not to be "real" (or exploitable) is, I think, virtually uncontested by anyone. Including uncontested by people who think there was a tech bubble in the late 1990s and a housing bubble in the mid 00's.
I hear Fama interviewed after he got the prize. He denies that the internet bubble and the housing bubble were bubbles, in the sense that they were knowable enough to be acted upon. In particular, he claims that anybody who detects the internet bubble and/or the housing bubble will also detect a bunch of non-bubbles such that any action they take to make money off their knowledge of the real bubbles will be (at least) completely negated by what they lose when they are exploiting unreal bubbles.
Efficient Market Hypothesis denies knowable bubbles, at least according to Fama interviewed within the last month.