Weekend Reading & Selected Links
Happy weekend! Here are some links to things I've been reading or watching that you might also enjoy:
- My new podcast conversation, with Eugene Fama. At the bottom of this email, I've reprinted three excerpts from the conversation.
- 'A time for truth and reconciliation', Peter Thiel's new FT article.
- Only a few tickets left to my upcoming salons in Sydney and Melbourne. Get yours here.
- Mr and Mrs Smith review Reentry, by Eric Berger.
- The Best Tacit Knowledge Videos on Every Subject.
- I enjoyed the Don't Die doco. Bryan is doing an important job pushing open the Overton Window. Also, cool that an Aussie is the other key person behind the effort.
- Zhengdong Wang's 2024 letter.
- Ananyo Bhattacharya on The MANIAC.
Have a great weekend,
Joe
Excerpts from my podcast with Eugene Fama
1. Who is "the most important person in behavioural finance"?
EUGENE FAMA: Now the problem is that behavioral finance, behavioral economics, doesn't have any models of their own. It's just a criticism of other models.
So I've always chided Dick Thaler and told him, “Hey, it's easy to criticize my models if that's what you guys do. Give me a model of yours that I can criticize.”
Never happens.
I really get under his skin when I say, well, there's no real behavioral economics. It's just a branch of efficient markets. You don't have a model of your own. You just have a criticism of efficient markets. So they're really just my cousin.
JOSEPH WALKER: I heard a debate between you and Thaler where you said that you were the most important person in behavioral finance.
FAMA: That's what I said. That's another one of my lines. Without efficient markets they'd have nothing to criticize.
WALKER: Yeah. Do you think eventually the anomalies will coalesce into a theory?
FAMA: That is the hope, but hasn't happened so far.
WALKER: Are there any good efforts that you've noticed? Stuff maybe by Andrei Shleifer or…?
FAMA: No, Andre is trying to develop behavioral models. So he's trying to give content to what I would call plus-content to the behavioral aspect. But I haven't seen anything from that school yet.
2. Fama on Kahneman
FAMA: ...Take the book Thinking Fast, Thinking Slow. Okay. That's Kahneman's big seller. So I threw this one at Thaler and he didn't have an answer to it. I said, "Dick, that's not a scientific theory. What can't I explain with thinking fast and thinking slow? It's a tautology."
And he thought about it and I think he agreed that was not... And that's an incredibly popular book that people think is full of insights. But the basic presumption is a tautology.
WALKER: Being dual process theory.
FAMA: Yeah, right. If you tell me, okay, I'm going to explain what you did because you were thinking too fast, and I'm going to explain what you did because you were thinking too slow, what can't I explain then?
WALKER: But shouldn't we think of that as the underlying conceptual framework. It's like evolution—evolution by natural selection is a tautology as well. In a way, isn't the efficient markets hypothesis a tautology?
FAMA: No, because I can contradict it. I can get evidence that contradicts it.
3. On the efficiency of housing markets
WALKER: Let's talk about housing. So there's good empirical evidence that housing markets are relatively less efficient than stock markets.
FAMA: What do you mean by that, though?
WALKER: So, for example, I think there's a paper by Case and Shiller where they find enormous inertia, momentum, in house prices.
FAMA: Right, right.
WALKER: So firstly, do you agree with that claim that housing markets are relatively less efficient?
FAMA: It's very difficult to tell because the data are not that good. I don't think you can really test... I'd love to do it. I don't think you can really test efficiency in the housing market. So they constructed these indices which... They're very good. They're the best housing indices available. But they basically are moving averages. So you're not going to test market efficiency with moving averages. You're building lags into the data.
So I think that's a really difficult question.
WALKER: Okay, so it's hard to test.
FAMA: It's hard to test in that market. The housing market is very difficult to do those kinds of tests.
WALKER: Yeah, but aren't there good reasons to think a priori that housing markets would be less efficient? So, for example: very high transactions costs; they're less liquid; you can't short sell houses; they're simultaneously investment and consumption goods, so you have a lot of amateur investors, you have homeowners.
FAMA: I don't know. Some of those things are common to lots of markets, and they don't seem to destroy market efficiency. I don't know why they would in this one. Common stocks are very expensive to short. So I'm not sure that... It could make it more difficult, but I'm not sure that it should destroy efficiency in that market.
So the issue is, doesn't everybody that buys a house want to get the best possible price? The buyer and the seller both want the best possible price, so they have all kinds of incentives to investigate whether they're getting a good price or the right price. If that doesn't work, I don't know. I don't know how to test it unless you gave me really good data on all the transactions that take place.
And even then you get a quality problem. So every house is different. So it's not like they're all comparable. There are price series on General Motors and whatever. That's the beauty of the Case-Shiller thing is they [take] repeat sales of the same house.
But they still have the quality problem because they're looking across houses and constructing indices.
WALKER: Right. And people can modify their homes over time.
FAMA: Sure. Right. It's a difficult issue. But I wouldn't say a priori that there are problems, something about that market that makes it less efficient automatically, because other markets have problems too.
WALKER: But I guess it's a difference of degree.
FAMA: Maybe, maybe. But I don't think we have the data that allow us to tell how bad it really is—if it is bad.