Shiller Subtweets Fama, March 2000

Subtweet

Know Your Meme: A subtweet, a shorthand for “subliminal tweet,” refers to a status update on Twitter that is covertly addressed to a specific individual without the handle of the recipient.

Urban Dictionary: the shortening of “subliminal tweet” which is directly referring to a particular person without mentioning their name or directly mentioning them and it basically indicates that the tweet in which the hashtag is used is a subliminal tweet. Basically, it’s talking about someone behind their back but sort of in their face on Twitter.

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The shock of Professors Robert Shiller and Eugene Fama sharing the Nobel Prize in Economics this winter – despite having virtually opposite opinions on how markets work – still has not worn off. People want to talk about virtually everywhere investing nerds coalesce. I’ve had at least half a dozen barroom coffee shop discussions about it with friends and colleagues myself.

For the uninitiated, Bob Shiller’s view is that people – and by extension the markets they comprise – are fundamentally emotional and irrational in how they behave. Eugene Fama, on the other hand, believes that markets price all new information efficiently and investors, by and large, make appropriate, rational decisions based on what is known at the time. My own view on this matter continues to evolve, but the more I’ve seen and experienced over the years, the more closely I’ve become aligned with the Irrational camp and the further I’ve been yanked from the Efficient one.

This weekend, Shiller revisited his time on stage accepting the award and he can’t quite shake the disagreement he has with Fama’s efficient markets framework (see: ‘The Rationality Debate, SImmering in Stockholm’, NYT January 19th).

I think it’s pretty funny that, after so much time, both of these obviously brilliant men could continue to disagree. They’ve been collecting data for decades now, each man bolstering his case with the latest research and study results. Reconciliation at this point is probably impossible. It shows you how hard the truth is to come by, even for the very brightest among us.

I went back to a passage from Shiller’s landmark book, Irrational Exuberance, which chronicled the Tech Bubble of the late 1990’s in real-time and predicted its eventual bursting. Here’s what he had to say about the Markets Are Efficient school as the Dow Jones was skyrocketing from 3600 to 11,200 in the space of a few years…

“Within the past generation the branch of financial theory that is derived from the assumption that all people are thoroughly rational and calculating has become the most influential analytical device to inform our mastery of the market. Those financial theorists who consider the market price to be a cunningly efficient processor of financial information have had a profound effect on the systematic management of the world’s wealth, from the corner stockbroker right up to the Federal Reserve. But most of these scholars of finance and economics shrink from public statements about the level of the stock market (although they are often more loose-lipped in expressing their opinions at lunch and over beers) because they do not want to be caught saying things in public that they cannot prove. Assuming the mantle of scientific detachment, these financial economists tend to fall back on the simple but elegant model of market efficiency to justify their professional position.”

That quote appeared in the first edition of Irrational Exuberance, which was published in March of 2000, at precisely the top and end of the secular bull market. By that time, the Nasdaq had exploded from 2500 (at which it traded for 50 times earnings) to over 5000 within the space of a year. How anyone could’ve been arguing with Shiller that this was somehow rational investor behavior is beyond a reasonable observer’s comprehension. With the benefit of fourteen years’s remove, it is hard to make the efficiency case with a straight face.

Rather than call out Fama or anyone else at the Chicago School of Business by name, the professor dropped the above subtweet into the preface of his book. It predated Twitter’s existence by six years and presupposed the subtweet itself by about nine. To which I say: Well done, sir.

Sources:

The Rationality Debate, Simmering in Stockholm (New York Times)

Irrational Exuberance: (Second Edition)  (Amazon)

Watch Also:

Robert Shiller live from the World Economic Forum in Davos comments on the markets today (CNBC)