Word: marketeers
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Dates: during 2000-2009
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Emboldened by this work, economists began to apply their number-crunching skills to the postwar market. Chicago graduate student Harry Markowitz devised a model for picking stocks that was, in Friedman's estimation, "identical" to his artillery-shell-fragmentation trade-off. And in the late 1950s, scholars at Chicago and the Massachusetts Institute of Technology became enamored of the idea that stock-market movements were, like many physical phenomena, random...
...strands of statistics and pro-market ideology came together in the mid-1960s. It was the great MIT economist Paul Samuelson who made the case mathematically that a rational market would be a random one. But Samuelson didn't share Friedman's political views, and he never claimed that actual markets met this ideal. It was at Chicago that a group of students and young faculty members influenced by Friedman's ideas began to make the case that the U.S. stock market, at least, was what they called "efficient...
Their evidence? Mutual-fund managers failed as a group to outsmart the market, and studies showed that new information was quickly incorporated into prices. Eugene Fama, a young professor at Chicago's business school, tied all this together in 1969 into what he dubbed the efficient-market hypothesis. "A market in which prices always 'fully reflect' available information is called 'efficient,'" he wrote--and the evidence that such conditions prevailed in the U.S. stock market was "extensive, and (somewhat uniquely in economics) contradictory evidence is sparse...
...didn't take long for a new generation of scholars, many with roots at Samuelson's MIT, to start pointing out the problems. Samuelson protégé Joseph Stiglitz showed that a perfectly efficient market was impossible, because in such a market, nobody would have any incentive to gather the information needed to make markets efficient. Another Samuelson student, Robert Shiller, documented that stock prices jumped around a lot more than corporate fundamentals did. Samuelson's nephew Lawrence Summers demonstrated that it was impossible (without a thousand years of data) to tell a rationally random market from an irrational...
Shiller and Summers in particular came to revel in tweaking the rational-market establishment. Shiller declared in 1984 that the logical leap from observing that markets were unpredictable to concluding that prices were right was "one of the most remarkable errors in the history of economic thought." Summers described how financial markets were often dominated by "idiots" (he later dubbed them "noise traders" and co-authored a series of academic papers showing how their errors could move prices) and lamented at the 1984 meeting of the American Finance Association that "virtually no mainstream research in the field of finance...