Emmanuel Roman, Chief Executive Officer, PIMCO:In terms of finance and in terms of how behavioral economics has changed finance and the way people think about managing money, what are your takes in terms of how things have evolved?
Richard Thaler, Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics University of Chicago Booth School of Business:Well there… So, there are, I would say, two major ways. One is the question of the efficient-market hypothesis. So, as you know, my golf buddy Eugene Fama created the idea of the efficient-market hypothesis and that idea is that all asset prices are always equal to their true intrinsic value. And that any price changes are caused by news.
Text on Screen: Eugene "Gene" Fama, Nobel Laureate 2013 recipient, is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.
Now, there have been a whole series of things. The first time I met Eugene Fama was a couple of years after you first saw me. In 1987, there was a conference in Chicago to discuss the crash. So, this was actually the spring of 88.
So, those of you who are too young to remember, October 19th 1987 stock prices fell 20-25 percent.
Text on Screen: October 19, 1987 is known as Black Monday. All 23 major world markets experienced a decline in October 1987 resulting in worldwide losses of estimated $1.7 trillion US dollars.
Emmanuel: And no news, right?
Richard: On a day that nothing happened. The clo… The closest thing to a cause that any reporter could find was the Bundesbank had raised interest rates by 25 basis points. Now, normally that doesn't cause world stock prices to fall by 25 percent and nothing else happened.
The only news was that stock prices were falling all around the world. And, you know, it was a cascade. I think, it may have started in Hong Kong and the US fell 20 to 25 percent and then the rest of that week four of the biggest absolute changes occurred during that week. Monday it crashed, Tuesday it went up, Wednesday it went down. Now, again, the only news that was happening that week was that stock markets were going crazy. So, if only news is generating this – then, what's happening?
Emmanuel: That’s a problem.
Richard: So, at this little conference in Chicago Gene and I were on a panel. And Gene first said that the market was to be congratulated on how quickly it reached the new equilibrium – so, markets are efficient!
And then I asked a question to the audience. I said how many of you think that the present value of dividends fell 25 percent on October 19th and no one raised their hand. And Eugene was sitting next to me and he had raised his hand and I looked over at him.
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Recorded 15 October 2019
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