Robert Shiller: Eugene Fama was the person who really set the example for efficient markets. He wrote a survey article in 1969. "Efficient Capital Markets: A Review [of Theory and Empirical Work]." He put a slant on it… that nothing important contradicts it. It’s a question of what you think is important. I had a sense that the contradictions were very important…. It’s not like I disagree with him on everything. It’s more that I'm after a different thing. There’s a kind of idea that has been especially prevalent at [the University of Chicago]… to find the rational side of human nature very compelling…. I don’t find it quite so compelling. When I look around, I see a great deal of foolishness, and I can’t believe it’s not important economically….
The capital asset pricing model is a view of how to form an optimal portfolio. That is an interesting model. People who do portfolios ought to study the mean-variance model as a first approximation to what they should be doing in terms of portfolio management. But [Fama and company] took a next step… saying that everybody already does that… That can’t be right, because nobody understood it when the model was first developed. There’s an element of absurdity that they refuse to acknowledge….
Here’s where the efficient markets hypothesis gets you into trouble. The idea that everyone will manage their 401k plan optimally is really not right…. If you press Gene Fama or Lars Hansen on this, I suspect they would give in. They’d have to admit that's what the evidence shows. But it’s not their habit to emphasize it. That’s where we differ, perhaps….
As a child I wanted to be a scientist. Maybe I'm trying to do that as as social scientist. I had a view that emerged as a child really that science is about respect for the facts, about really studying nature and trying to take into account all the facts. No legends or myths or self-serving stories. I wanted to know the real facts. I thought that’s what a scientist does. You devise an experiment if there's any confusion…