October 14

Professor Fama’s Nobel Prize and You

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We are thrilled to share yesterday’s news that University of Chicago Professor and Dimensional Fund Advisors board member Eugene F. Fama, has been named a co-recipient of the 2013 Nobel Prize in Economic Sciences, in recognition for his contributions to the “empirical analysis of asset prices.”

It’s about time we had some wonderful investment news to celebrate! It’s also about time that Professor Fama has been tapped to receive among the highest academic honors available. Dr. Fama’s groundbreaking work in capital market theory has unquestionably enhanced our ability to assist each of our clients in achieving their personal long-term investment goals – whether the contribution has been realized or unsung.

In short, much of our understanding on how to identify and practically harness the relationships between market risks and expected returns is grounded in Dr. Fama’s work, which began nearly a half-century ago in 1966, with the formation of the Efficient Market Hypothesis.

Dr. Fama has not rested there. You can see his ongoing contributions at Dimensional’s public Fama/French Forum. (We also recommend this fun, short video sharing Dr. Fama’s modest perspective on his life’s work to date. He compares his earliest work to “shooting fish in a barrel.” If only it were so easy!)

Nor has he worked in a vacuum. In his Nobel prize interview, Dr. Fama lauds his collaborators at the University of Chicago and elsewhere: “I couldn’t do what I did without the help of my professors at the time and colleagues since then and students since then.”

Which brings us to Dr. Fama’s co-recipients, fellow University of Chicago Professor Lars Peter Hansen and Yale University Professor Robert J. Shiller. For many on the inside of financial economic drama, the shared award comes with some bemusement, in that Dr. Shiller is often found at loggerheads with Dr. Fama regarding the role that market efficiency plays in investors’ decisions. In a Bloomberg column, 1987 Nobel laureate Robert Solow said that naming professors Fama and Shiller as co-recipients is “like giving a prize to the Yankees and the Red Sox.”

As in any academic field, financial economists forever wrangle over points that may seem agonizingly granular to most of us, but that can still have significant impact on our daily lives – for good or for ill. In this case, the debate is approximately over whether overall market efficiency should lead us to patiently participate in the market throughout its volatile swings, or whether potentially predictable irrational investor behavior (bubbles) may justify trying to respond to shorter-term fluctuations.

In light of the collective evidence available from professors Fama, Shiller and others whose work we routinely track, we remain convinced that your best financial interests are served – and your carefully planned goals most likely achieved – by avoiding the expenses involved in trying to profit from market irrationality. The practical hurdles continue to strike us as counterproductive in a long-term planning process.

Please let us know if we can explain our position further; we’re happy to do so at any time. In the meantime, as we celebrate Dr. Fama’s richly deserved reward for his contributions to our financial lives, we are delighted to be part of your life as well, helping you objectively sift through often-conflicting headlines related to financial economics, global news, and your own life transitions. We relish our role of helping you arrive at a disciplined strategy to carry you through toward your personal goals … come what may.


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About the author

Gardner is a CERTIFIED FINANCIAL PLANNER and principal of Sherrill Wealth Management in Bradenton, Florida. He has spent 20+ years in the wealth management field helping families negotiate the various obstacles and opportunities that retirement provides them.
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