Eugene Fama vs Robert Shiller
Overview
In 2013 the Nobel committee gave one prize to two economists whose readings of asset prices are difficult to reconcile, alongside Lars Peter Hansen. That decision is the best short summary of where the question stands: the evidence is strong on both sides and the disagreement is genuine rather than a misunderstanding.
Fama showed that prices are very hard to predict at short horizons and absorb public information quickly. Shiller showed that they swing far more than the dividends and earnings beneath them, and that some of the movement is predictable over long horizons. Both findings have survived decades of scrutiny.
Quick comparison
| Dimension | Eugene Fama | Robert Shiller |
|---|---|---|
| Investment philosophy | Prices reflect available information, so a public document is not an edge. | Prices contain a large social component that fundamentals cannot explain. |
| Risk philosophy | Risk is compensated exposure to identifiable factors. | Risk includes the possibility that prices are simply detached from value. |
| Valuation approach | Not a separate activity. The price is the best available estimate. | Cyclically adjusted earnings give a reference point the price can depart from. |
| Portfolio construction | Broad, low-cost, tilted toward factors if at all. | Broad and diversified, with expectations adjusted to starting valuations. |
| Diversification | Essential, and the only free lunch the theory allows. | Essential, and extended to include property and other asset classes. |
| Market timing | Impossible, and attempts are the main way investors lose to the market. | Not possible at short horizons, though long-run returns are partly predictable. |
| Economic beliefs | Sceptical that bubbles can be identified in advance or usefully defined. | Bubbles are real, socially transmitted and describable while they inflate. |
Scroll the table sideways on a narrow screen. Each dimension is explained in full below.
Investment philosophy
Prices reflect available information, so a public document is not an edge.
Prices contain a large social component that fundamentals cannot explain.
Fama's efficient market hypothesis is a claim about information, not about correctness: a price can be wrong and still be the best summary of what is known. Shiller's excess volatility finding says the observed swings are too large for that summary to be doing the work claimed for it.
Risk philosophy
Risk is compensated exposure to identifiable factors.
Risk includes the possibility that prices are simply detached from value.
The factor models treat higher returns as payment for bearing a measurable characteristic. Shiller's position implies part of what looks like risk premium is mispricing that may or may not correct on any useful timescale.
Valuation approach
Not a separate activity. The price is the best available estimate.
Cyclically adjusted earnings give a reference point the price can depart from.
Shiller developed the cyclically adjusted price-to-earnings ratio with John Campbell precisely to have something the market price could be measured against. Fama's framework has no equivalent, because it does not accept that a better estimate is available.
Portfolio construction
Broad, low-cost, tilted toward factors if at all.
Broad and diversified, with expectations adjusted to starting valuations.
In practice these converge more than the theory suggests. Neither recommends stock picking. The difference is that Shiller's framework implies a saver should expect less from a market bought at a high cyclically adjusted ratio.
Diversification
Essential, and the only free lunch the theory allows.
Essential, and extended to include property and other asset classes.
They agree. Shiller's work on housing was partly motivated by the observation that households hold enormous undiversified exposure to a single property.
Market timing
Impossible, and attempts are the main way investors lose to the market.
Not possible at short horizons, though long-run returns are partly predictable.
This is the practical crux. Shiller is careful that a high ratio says something about the next decade and nothing about the next year, which limits how much the disagreement changes anyone's behaviour.
Economic beliefs
Sceptical that bubbles can be identified in advance or usefully defined.
Bubbles are real, socially transmitted and describable while they inflate.
This is the sharpest divide. Fama has questioned whether the word bubble carries a usable meaning. Shiller treats them as epidemics spread by stories and price movement, and wrote a book about one shortly before it burst.
Famous books
- The Theory of Finance1972Eugene Fama
A graduate text written with Merton Miller. Technical rather than general reading, and included because it is where much of the early framework was set out formally.
- Foundations of Finance1976Eugene Fama
His textbook on portfolio decisions and securities prices. Also technical; his ideas reached general readers mainly through other writers rather than through his own books.
- Market Volatility1989Robert Shiller
The academic collection where the excess volatility work and its statistical defence are laid out. Technical, and the source most of the later argument refers back to.
- Irrational Exuberance2000Robert Shiller
His book for general readers on speculative episodes, published near the peak of the technology boom. The second edition extended the argument to housing.
- The New Financial Order2003Robert Shiller
On using financial instruments to spread ordinary household risks such as income and home value, rather than only investment risks.
- Animal Spirits2009Robert Shiller
Written with George Akerlof, on the role of confidence, fairness and stories in macroeconomics rather than in markets alone.
- Narrative Economics2019Robert Shiller
His case that popular stories spread like contagions and move the economy, and that economists should measure them.
Famous quotes
“I take the market efficiency hypothesis to be the simple statement that security prices fully reflect all available information.”
“Irrational exuberance is the psychological basis of a speculative bubble.”
“Stock prices are far more volatile than the dividends they are supposed to represent.”
Biggest successes
- Shared the Nobel Memorial Prize in Economic Sciences in 2013 for empirical analysis of asset prices.
- Published the 1970 review that gave market efficiency its standard three-part definition and framed the debate that followed.
- Built, with Kenneth French, the factor models that are now the common language for describing sources of return.
- Shared the Nobel Memorial Prize in Economic Sciences in 2013 for empirical work on how asset prices behave.
- Published Irrational Exuberance in 2000, close to the peak of the technology boom, and extended its argument to housing in the 2005 edition.
- Co-created a house price index that became a standard measure of residential property in the United States.
Biggest criticisms
A balanced view includes the main criticisms of each approach, presented neutrally.
- Momentum is the anomaly that has not gone away. Shares that have risen recently tend to keep rising for a while, which the three-factor model does not explain, and Fama and French themselves described it as the premier anomaly in the literature.
- Behavioural researchers, Robert Shiller among them, argue that prices move far more than fundamentals can justify, which is hard to reconcile with prices that faithfully reflect information.
- Critics say the joint hypothesis problem leaves the theory close to unfalsifiable in practice, because any evidence against efficiency can be attributed to the wrong model of expected returns instead.
- The cyclically adjusted ratio has read as expensive for long stretches during which markets kept rising, so anyone treating it as a timing signal spent years positioned badly. He argues it was never meant as one, and critics reply that this limits how much use it actually is.
- Jeremy Siegel argued in 2016 that changes in how reported earnings are calculated, particularly the treatment of write-downs, depress the earnings side of the ratio and make recent readings look higher than a consistent series would show.
- The excess volatility result was challenged on statistical grounds soon after publication, on the argument that the tests assume more about how dividends behave over time than the data can support.
Lessons investors can learn
Plain-English takeaways. Context for learning, not advice to buy or sell anything.
- 1Two careful researchers can read the same evidence and reach opposite conclusions, which is worth remembering before treating any measure as settled.
- 2A market can be hard to beat and badly priced at the same time; those claims are not contradictory.
- 3Both routes end at broad, low-cost diversification, which says something about how little the theory changes for an ordinary saver.
Who each approach suits
Readers who want to understand why beating the market is difficult, and why the case for index funds is usually made on information grounds.
Readers who want to understand why prices detach from fundamentals for years, and what a long-horizon valuation measure can and cannot tell them.
Common misconceptions
- The claim
Efficient markets means prices are correct.
What is actually the caseIt means prices reflect available information. A price can be a poor estimate of value and still be the best summary of what is currently known, which is a much weaker claim than it is usually reported to be.
- The claim
Shiller says you can time the market.
What is actually the caseHe says the opposite about short horizons. A high cyclically adjusted ratio has historically been associated with lower returns over the following decade and carries no information about the next quarter.
- The claim
The Nobel committee made a mistake.
What is actually the caseThe prize was for empirical analysis of asset prices, and both bodies of work are empirically strong. The committee was recognising that the question is unresolved rather than endorsing one answer.
Frequently asked questions
Why did Fama and Shiller share a Nobel Prize?
The 2013 prize was awarded for empirical analysis of asset prices, and their work sits on opposite sides of the same question. Fama established that prices are hard to predict at short horizons; Shiller established that they move far more than fundamentals justify and are partly predictable over long ones.
Who is right about market efficiency?
The question is genuinely unresolved. Fama's joint hypothesis problem means any test of efficiency is also a test of the pricing model used, so evidence against efficiency can always be attributed to the model instead. That is a real limit on what the data can settle, and Fama identified it himself.
What is excess volatility?
Shiller's 1981 finding that share prices swing several times more than the stream of dividends they are supposed to represent. If prices only reflected information about future cash flows they should be smoother than they are, and the gap is evidence that something else moves them.
Does this debate change what an ordinary investor should do?
Less than the intensity suggests. Both routes end at broad, low-cost, diversified holdings and neither supports stock picking or short-term timing. The practical difference is that Shiller's framework implies expecting less from a market bought when valuations are historically high.
Would Fama accept the CAPE ratio as evidence?
Only partly. He does not dispute that valuation ratios carry some power to predict long-run returns; he disputes what that implies. Under the joint hypothesis problem, predictability can reflect risk premiums that change over time rather than mispricing, so the same data Shiller reads as prices detaching from value can be read as compensation for risk shifting.
Investing philosophies behind this debate
Schools of thought one or both of these investors are associated with.
Strategies these investors are associated with
What the disagreement looks like as an actual way of running a portfolio.
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Educational content only. This is a neutral comparison compiled for learning. It is not an endorsement of either approach, not investment advice, and not a claim that either person is always right. Mentioning someone here does not imply they are affiliated with Money Masters Media.