Professor Fama's Folly: 'Financial Markets Are Efficient'

“Only the smallest fraction of economic writings, theoretical and applied, has been concerned with the derivation of operationally meaningful theorems. In part, at least, this has been the result of the bad preconception that economic laws deduced from a priori assumptions possess rigor and validity independently of any human behavior.  But only very few economists have gone as far as this. The majority would have been glad to enunciate meaningful theorems if any had occurred to them.....”

Professor Paul Samuelson, Nobel Prize Laureate

Professor Fama’s Folly

A recent missive from the investment publication Top1000Funds included a taped conversation between interviewer Amanda White and Professor Eugene Fama of the University of Chicago. The tape identified Prof. Fama as the Nobel Prize Laureate who is “The Father of Modern Finance”. Ms. White asked Prof. Fama to comment on a stated investment belief of Australia’s Future Fund (and many other funds) that “…markets can be inefficient….and skillful management can add value after fees…”. Prof. Fama responded that investors who really believed that “must be from the moon”. He went on to offer the opinion that he could not understand why people continued to cling to such beliefs when “no data in the world” supports that conclusion. After all, active management is “a zero-sum game less fees”.

These comments raise an interesting question. How might Prof. Fama’s career have unfolded if he had taken time to reflect on Prof. Samuelson’s observation cited above? Would he still think the Efficient Market Hypothesis to be an “operationally meaningful” investment theorem to guide institutional investing? Despite the fact that any school child knows that the EMH is based on a priori artificial assumptions “independent of any human behavior”?