Fama Has Shiller to Thank for his Nobel Prize



My Sunday Washington Post Business Section column is out. This morning, I look at how Eugene Fama’s early insights were nearly eclipsed by his latter bad theories.

Not to give away the ending, but if it weren’t for Robert Shiller’s criticism, Fama may very well not have won.

Here’s an excerpt from the column:

“For this, Fama is thought of as the intellectual father of indexing. The entire concept of passive investing in indexes grew around his insights. His work became hugely influential, and remains so to this day. If you own a Standard & Poor’s 500-stock index, you do so because of Fama the Younger’s observations.

Had he stopped there, Fama the Younger probably would have flown to Sweden to pick up his Nobel Prize money decades ago.

But the years went by, and Fama kept coming back to his hypothesis. He pushed it to all manner of odd places. So the Nobel committee was confronted with the problem of Fama the Elder — the second Eugene Fama. That professor built on his own work. The influence of his insight imbued the Elder with prestige far beyond what his latter flawed work should have generated. It allowed him to expand his efficient-market thesis. That, dear readers, is where our boy ran into trouble.”

I usually can gauge how resonant a column is by the comment response — but not this time. As of Sunday at 8am, not a single reader responded to it! I assume its due to the wonky nature of the subject matter.

Regardless, I am really pleased with the clever way the inherent conflict of the Nobel committee gets resolved. You can read the entire piece here.


How Shiller helped Fama win the Nobel
Barry Ritholtz
Washington Post, October 20 2013

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