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Eugene Fama and Richard Thaler debate efficient markets

Text and video.

Fama: [The efficient-market hypothesis] a model, so it’s not completely true. […] The question is: “For what purposes are they good approximations?” As far as I’m concerned, they’re good approximations for almost every purpose. I don’t know any investors who shouldn’t act as if markets are efficient. […]

Thaler: For the first part—can you beat the market—we are in virtually complete agreement.

Fama also cites Daniel Kahneman as recommending people to invest in ETFs.

Also, Fama doesn’t think governments or central banks should step in to deflate asset market bubbles:

Fama: We disagree about whether policy makers are likely to get it right, though. On balance, I think they are likely to cause more harm than good.

Thaler argues that the rational model is how people should behave, but it’s not how they do behave. And if you want to predict how people act, you have to take that into account:

Thaler: I believe the rational model, and I think that a lot of people screw it up, and that we can build richer models with a better predictive power if we include the way people actually behave as opposed to [the behavior of] fictional “Econs” that are super smart and have no self-control problems.