Word: marketic
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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...
...stock-market crash gave Shiller and Summers all the ammunition they needed. "If anyone did seriously believe that price movements are determined by changes in information about economic fundamentals," Summers said just after the crash, "they've got to be disabused of that notion by Monday's 500-point movement." The crash also demonstrated that prices didn't follow the statistical model of a random walk--if they did, a 20% one-day market drop like that of 1987 should happen only once in billions upon billions of years...
Subsequent years saw more challenges to the core assumptions of the rational market. Even Fama retested his 1969 efficient-market hypothesis and found it wanting. But the strong performance of the U.S. stock market and economy tended to silence doubts about the wisdom of the market both on campus and where it really mattered--in Washington and on Wall Street. Shiller warned repeatedly of irrational exuberance in stocks in the late 1990s and in housing in the early 2000s. He was largely ignored both times--until he turned out to be right. Unwillingness to countenance the possibility that market prices...
...issue isn't whether financial markets are useful--they are--or whether the prices of stocks or bonds or collateralized debt obligations convey information--they do. There's also much to be said for the insight at the heart of efficient-market theory: markets are hard to outsmart. But when we give up second-guessing the market, we suspend our judgment. And without participants' exercising judgment--applying research, heeding a broker's opinion--markets stand no chance of ever getting prices right...
Based on Fox's book The Myth of the Rational Market, published this month by HarperBusiness