There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s [Economics Nobel] Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller. (more)
Today news outlets of all sorts will report on this year’s Nobel prize in economics, which goes to three giants of finance. There will be lots of commentary on subtle results in finance and what they mean for stock returns and financial crises. But one thing you might not notice in all that commentary is a simple fact that seems too obvious and widely accepted among finance experts and the Nobel committee to be worth mentioning: speculative markets generally do an excellent job of aggregating information.
Among the many theories still debated to explain the wide variety of odd patterns in market prices, virtually none of them have much to do with speculators failing to act on cheaply available information. Why? Because so many folks in finance have long tried and failed to find satisfactory explanations along those lines, and have basically given up. This isn’t to say that we never see price errors after the fact, along with previously available info not very well considered. (See this nice example.) The point is that there are few interesting or consistent pattern of such things; mostly speculators just make excusable mistakes about what info to consider.
Yet even though this simple fact seems too obvious for finance experts to mention, the vast majority of the rest of news coverage and commentary on all other subjects today, and pretty much every day, will act as if they disagreed. Folks will discuss and debate and disagree on other subjects, and talk as if the best way for most of us to form accurate opinions on such subjects is to listen to arguments and commentary offered by various pundits and experts and then decide who and what we each believe. Yes this is the way our ancestors did it, and yes this is how we deal with disagreements in our personal lives, and yes this was usually the best method.
But by now we should know very well that we would get more accurate estimates more cheaply on most widely discussed issues of fact by creating (and legalizing), and if need be subsidizing, speculative betting markets on such topics. This isn’t just vague speculation, this is based on very well established results in finance, results too obvious to seem worth mentioning when experts discuss finance. Yet somehow the world of media continues to act is if it doesn’t know. Or perhaps it doesn’t care; punditry just isn’t about accuracy.
Even these Nobel prize winners, now that they have the attention of the world for a few days, won’t bother to mention how we could use finance to effectively answer most of the non-finance questions we commonly debate. These academic finance experts won’t even think to discuss how the academic finance community itself could use speculative markets to create and disseminate accurate estimates on important disputes in academic finance. Is that because they don’t notice, or don’t care, or what?