Prices of an asset is indeterminable in the short run?

Eugene Fama, Lars Hansen and Robert Shiller have won the Nobel Prize for economics this year for their empirical analysis of asset prices.(Link here)

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The trio tried to get a grasp on the nature of the determinants of asset returns empirically. They have proposed that stock prices behave randomly on short term horizon, and that any effort to time the market in the short term is probably counterproductive. Their research also showed that the markets can become broadly mispriced for long periods of time due the the mysteries of human psychology.

This implies that any effort to determine prices in the short term will be futile and will be analogous to a bet in the casino. Their findings have led to skepticism on the multibillion dollar mutual fund industries and may in turn, lead to the potential growth of passive fund management industries.

If what they are proposing is a theoretical analysis for homogenous markets then it might be true, but it cannot be shown to be true in reality. Exchanges in general are not fool proof systems. Insider trades leading to multi million block transactions happens, and when it does, it is very difficult to spot. In my opinion, this extra chaotic element could curtail any math equation as such actions favor those who have access to the first hand information.

Regardless of what form of control is used to drive the market, our economy is only as stable and predictable as the people driving it. An interesting academic read nonetheless.


  1. Hi Hayden

    I think as long as there are people that is driving the market, there will always be differences in opinions between buying and selling and hence caused a mismatch in the asset price, even if it extends to long term.

  2. Hi B,

    I agree with you, human psychology is erratic and unpredictable, a forward looking model can price an asset many times over its book value even in the long run.

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