Eugene Fama on bubbles, 2013

The word "bubble" drives me nuts, frankly, because I don't think there's anything in the statistical evidence that says anybody can reliably predict when prices go down. So if you interpret the word "bubble" to mean I can predict when prices are going to go down, you can't do it. ...

I believe markets work. And if markets work those things shouldn't be predictable. If I can predict that housing prices will go down, if the market's working properly, they should go down now ... If the market's working properly the information should be in the prices.

I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It's easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can't exist?

They have to be predictable phenomena. I don't think any of this was particularly predictable.

So, was Shiller one of those people who was anointed by the media?

Oh yes. ...

What would prove it to you that there were bubbles?

Empirical evidence.

Such as?

Well, that you could show me that you can predict when these things turn in some reliable way.

So what is your challenge to Robert Shiller? He should predict the next bubble?

[laugh] Right. Well, I don't know. Not just the next one. You know, statistically reliability means more than two, really.

The next 10?

Well, the next 10 would be really convincing. Yeah then I'd be convinced.

We asked Shiller what he thought about this:

Fama says he would believe there were bubbles if you could predict ten of them in a row.

Yeah, but I don't live that long. You know, these big bubbles are rare events that play out over years. They can go a long time.

If you lived long enough, do you think you could make good on Gene Fama's request that you predict 10 bubbles in a row?

If I lived long enough, yeah.

You do think you could?

Uh. I think so. Yeah. I'm not the most self confident person.