Noah Smith has a nice post this morning:
Noah Smith: Risk premia or behavioral spazzing?:
John Cochrane is quite critical of Robert Shiller.... He... thinks that Shiller is trying to make finance less quantitative and more literary (I somehow doubt this, given that Shiller is first and foremost an econometrician, and not that literary of a guy).
But the most interesting criticism is about Shiller's interpretation of his own work. Shiller showed... stock prices mean-revert. He interprets this as meaning that the market is inefficient and irrational... "behavioral spazzing". But others--such as Gene Fama--interpret long-run predictability as being due to predictable, slow swings in risk premia.
Who is right? As Cochrane astutely notes, we can't tell who is right just by looking at the markets themselves. We have to have some other kind of corroborating evidence. If it's behavioral spazzing, then we should be able to observe evidence of the spazzing elsewhere in the world. If it's predictably varying risk premia, then we should be able to measure risk premia using some independent data source...