What's A Bubble? | WAMU 88.5 - American University Radio
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What's A Bubble?

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Robert Shiller was surprised when he got the call telling him he'd won the Nobel Memorial Prize in economics — surprised that he'd won (of course), but also surprised that he was sharing the award with Eugene Fama.

"He and I seem to have very different views," Shiller told me. "It's like we're different religions."

In particular, they have very different views about economic bubbles.

"The word 'bubble' drives me nuts, frankly," Fama told me.

Fama believes markets are basically rational. At any given moment, he says, prices reflect the collective wisdom of everyone in the market. If it were clear that prices were irrationally inflated, investors would stop buying en masse — and prevent a bubble from getting out of control, he says.

Shiller, on the other hand, is famous for describing bubbles, and for predicting the two big ones of our time — the dot com bubble and the housing bubble.

Fama is unimpressed. "What happens each time is the media goes in and finds somebody who predicted it and that person gets anointed," he says. "You don't go back and look at past predictions and see, 'Is this just luck?'"

Fama says if Shiller could predict, say, the next 10 bubbles, he would be convinced. Shiller says he thinks he probably could predict the next 10 — if he lived long enough.

This is more than an academic debate. If you believe bubbles are predictable then maybe you can slow or stop them. If you think they're hard or impossible to spot, there's not much to be done.

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