What the Great Fama-Shiller Debate Has Taught Us
Some summary thoughts, piggybacking on smarter people’s takes on the 2013 Economics Nobel announcement.
It’s a little hard to imagine a Nobel Prize in physics being shared by (1) a guy famous for advancing a particular hypothesis and (2) a guy famous for relentlessly attacking that hypothesis. This of course is what the Nobel committee has done with this year’s economics award…
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This is, to a certain extent, further evidence that economics isn’t a science like physics is a science (and yeah, yeah, the economics Nobel isn’t a real Nobel prize). But that’s not because economists are all frauds — it’s at least partly because economics is harder than physics. And the interaction over the decades between the differing ideas of Fama and Shiller, while maybe not exactly scientific, has certainly been enlightening, and had a huge impact on the world.
The piece I linked is a pretty good recap of the of the laureates’ work, and a lot of the passage above is close to my own view. I especially agree with the “econ is harder” part — mostly because professional, academic economics is a much younger discipline than professional, academic physics. What I disagree with in the passage, though, is the assertion that awarding scholars whose main contributions are in tension with each other is evidence againstecon being a science. I simply don’t see the logic there.
My understanding is that science is supposed to progress in exactly this way, by having great discoveries tested, revised and improved upon, which eventually leads to other great discoveries. So for example, if someone makes a fundamental discovery in physics which is then extended (with further fundamental insights) by someone else within the lifetimes of both principal researchers, then I can quite readily imagine both being awarded a Nobel. Some people criticise the “shoulders of giants” conception of the scientific process for being too idealised, yet it’s a very good approximation of the development of financial economics in the past 50 years!
Physics did not cease to be a science when parts of Newton’s theory of gravity were falsified by Einstein testing relativity theory. Similarly, the fact that flaws in Fama’s early formulations were highlighted and improved upon (by Shiller, Stiglitz and others) adds nothing to the debit column on the scientific merits of economics. That’s a different (though also interesting) debate.
Update: Since drafting this post on Tuesday morning, I read a great post by Noah Smith on the same topic. His piece fleshes out the Fama-Shiller/Newton-Einstein analogy a hundred times better than I could have (so you should read it), showing that they aren’t perfectly analogous in fact:
Shiller is really more like Michelson & Morley than Einstein. He found an anomaly — mean reversion in stock prices — that provoked a paradigm shift. In other words, Shiller really discovered behavioral finance rather than inventing it (actually, Fama, whose work is mainly empirical, isn’t really like Newton either). The theorizers who came up with the reasons why markets couldn’t be completely efficient were people like Joseph Stiglitz, Sanford Grossman, Paul Milgrom, and Nancy Stokey. I hope those people win Econ Nobels as well (Stiglitz, of course, already has one). But that paradigm shift built on the EMH, it didn’t knock it down.
Originally published at crimesagainsthumility.tumblr.com.
