Fama Nobel_16x9

The American Enterprise Institute Honors Eugene Fama

Fama Nobel_16x9

The American Enterprise Institute for Public Policy Research (AEI) is a private not-for-profit think tank whose stated mission is "to defend the principles and improve the institutions of American freedom and democratic capitalism—limited government, private enterprise, individual liberty and responsibility, vigilant and effective defense and foreign policies, political accountability, and open debate". Earlier this week, AEI bestowed its annual Irving Kristol Award to Nobel laureate Eugene Fama. As with most of these sorts of honors, this one involved a formal banquet, but instead of the usual acceptance speech, they had Paul Gigot (the editor of the Wall Street Journal editorial page) interview Fama. The full interview can be seen above.

Our hats are off to Mr. Gigot, as he did a fantastic job in eliciting great comments from Professor Fama. After setting up the basic parameters of Fama’s Efficient-Market Hypothesis (EMH), Gigot leads in with this question:

“So it [EMH] means a dumb guy like me, if I want to invest, I should just put my money in an index fund because there is no other chance that I am going to be able to hire somebody that is smart enough to make more than the index fund, and I’ll also pay more for the privilege of investing with him?”

To which Fama brilliantly retorted:

“I don’t know anybody who that doesn’t hold for…Maybe my range of acquaintances isn’t broad enough!”

Naturally, the discussion veered into the work of Robert Shiller, one of Fama’s fellow Nobel laureates of 2013 who has written extensively on asset price bubbles. Gigot brought up a recent article suggesting that based on the Shiller price-to-earnings ratio, the stock market may be overvalued and due for a fall. When Gigot asked Fama if it was time to sell, Fama responded that people should only sell their portfolio when they are ready to consume, a statement we have made on many occasions. Fama leveled a broader criticism against the behavioral-based attacks on EMH when he noted that they fail to produce a model that can be tested.

As would be expected from AEI, the interview picked up the topic of government intervention in the financial markets, particularly during the financial crisis of 2008. Unsurprisingly, Fama voiced his opposition to the bailouts and the resulting “disaster” of “too big to fail”. When Gigot asked Fama if he had any suggestions for how government can aid economic growth, Fama hilariously replied, “How about taking a year off?”

There is no doubt in our minds that Professor Fama will receive many more such honors as this one, and they will not affect his deep humility. We, of course, will do our utmost to capture videos such as the one above so that we have an extensive record of his brilliant thoughts and pithy yet powerful quotes.