Exhibit 33 (Dkt. 559-35, S.D. Fla.)
Summary
Exhibit 33 (Document 559-35) in Case 1:21-md-02989-CMA, entered on the FLSD docket April 28, 2023, is an eight-page printout, dated 4/27/23, of a Chicago Booth Review article, Eugene F. Fama, Efficient Markets, and the Nobel Prize, by John H. Cochrane, dated May 20, 2014. The article recounts that in 1970, in Efficient Capital Markets: a Review of Theory and Empirical Work, Eugene F. Fama defined a market as informationally efficient if prices at each moment incorporate all available information about future values, and describes informational efficiency as a natural consequence of competition, relatively free entry and low costs of information. It states that much of the confusion about efficiency reflects ignorance of this definition, which uses a common word for a precise phenomenon.
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- Date
- 2023-04-28
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“Exhibit 33 (Dkt. 559-35).”
Original at archive.org, dated 2023-04-28. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-04-28-covid-era-misc-073a18f3-1/
, SHA-256 073a18f34590f0186bfe0db4e9f2db19353a3f1178474e032b4e366979277547.Full text
Case 1:21-md-02989-CMA Document 559-35 Entered on FLSD Docket 04/28/2023 Page 1 of 8
EXHIBIT 33
Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 2 of 8
MONETARY HEALTH CLIMATE
INEQUALITY RACE
POLICY CARE CHANGE
Chicago Booth Review Eugene F. Fama, Efficient Markets, and the Nobel Prize
Eugene F. Fama,
Efficient
Markets, and
the Nobel Prize
Gene's bottom line is always: Look at the facts. Collect the
data. Test the theory.
By John H. Cochrane May 20, 2014 CBR - Finance Share This Page
I
n 1970, in “Efficient Capital Markets: a Review of Theory and
Empirical Work,” Eugene F. Fama defined a market to be
“informationally efficient” if prices at each moment incorporate all
available information about future values. Informational efficiency
is a natural consequence of competition, relatively free entry, and low
costs of information. If there is a signal, not incorporated in market prices,
that future values will be high, competitive traders will buy on that signal.
In doing so, they bid the price up, until it fully reflects the information in
the signal.
Much of the confusion about “efficiency” reflects simple ignorance of this
definition. Fama used a common word to define a precise phenomenon
apart from the word’s colloquial meaning. Researchers define terminology
this way all the time—“efficient” estimators in statistics, “Pareto-efficient”
allocations in economics, and so forth have precise definitions. But people
https://www.chicagobooth.edu/review/eugene-fama-efficient-markets-and-the-nobel-prize 1/7
Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 3 of 8
who don’t know those definitions can say and write nonsense about the
academic work.
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An informationally efficient market need not process orders efficiently. An
informationally efficient market can have economically inefficient runs
and crashes, so long as those crashes are not predictable. To say “the
crash proves markets are inefficient” or “markets are inefficient; finance
academics did not foresee the crash” is a classic reflection of this
ignorance. The main prediction of Gene’s efficient-markets hypothesis is
exactly that stock price movements are unpredictable! An informationally
efficient market is not supposed to be clairvoyant. Steady profits without
risk would, in fact, be a clear rejection of efficiency.
I once told a reporter that I thought markets were pretty efficient. He
quoted me as saying that markets are “self-regulating.” Here is somebody
with no clue about the definition of the term (although I had explained its
definition). Informational efficiency means one and only one thing: prices
reflect available information.
A simple theory
and complex facts
The efficient-markets theory did not become famous because it is
complex. The greatness of Fama’s contribution lies in the fact that
efficient-markets became the organizing principle for decades of
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Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 4 of 8
empirical work in financial economics. This empirical work taught us much
about the world, and in turn affected the world deeply.
When you think of Fama, don’t think of Einstein, churning out equations in
the solitude of the Swiss patent office. Think of Darwin, who also saw that
a simple principle—evolution by natural selection—organized and gave
purpose to a vast collection of facts. Fama is really most famous for
putting all the facts together, personally collecting a lot of finch beaks,
and figuring out how the curiosities collected by others fit in to the
framework, in often challenging and unexpected ways.
Furthermore, though the principle is simple, its implications are often
surprising, subtle, and remain controversial to this day. Efficiency implies
that simple trading rules (e.g. “buy when the market went up yesterday”)
should not work. This is a testable proposition, and an army of financial
economists, including Gene, checked it. The surprising empirical result is
that trading rules, technical systems, market newsletters, and so on have
essentially no power beyond that of luck to forecast stock prices. This is
not a theorem, an axiom, a philosophy, or a religion: it is an empirical
prediction that could easily have come out the other way, and sometimes
does.
Similarly, if markets are informationally efficient, fundamental analysis
performed by investment firms has no power to select stocks, and
professional active managers should do no better at picking stock
portfolios than monkeys with darts. This is a remarkable proposition. In
any other field of human endeavor, seasoned professionals systematically
outperform amateurs. But other fields are not so ruthlessly competitive as
financial markets.
Many studies checked this proposition. It’s not easy. Among other
problems, you only hear from the winners. Nobody writes articles
celebrating the worst-performing mutual fund manager. You need to
collect data from the losers, too, and separate luck from skill.
These studies found, surprisingly, that the data are much closer to the
efficient-markets prediction than anybody thought. Professional
managers do not systematically outperform well-diversified passive
investments. This could easily have come out the other way. It would have
been lovely had it come out the other way. Academics who earn our
salaries teaching MBA students would be delighted to instruct them that
better knowledge and training lead to more profitable investment
management. Too bad the facts say otherwise.
If markets are informationally efficient, corporate news events such as
earnings announcements should be immediately reflected in stock prices.
Now, actually checking stock-price reactions to corporate events is also
not as straightforward as it sounds. But Gene and his coauthors provided
the standard solution to all of the empirical difficulties that survive to this
day. The immense event-study literature followed, allowing academic
accounting to measure the effect of corporate events by the associated
stock price movements.
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Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 5 of 8
The practical implications of the finding that markets are surprisingly
efficient are enormous. The rise of the index fund owes much to efficiency.
Without efficiency, we might all be invested with high-fee active managers
who promise us higher returns at someone else’s expense. Standard
procedures in accounting, regulation, and law now routinely presume that
asset prices are the best measure of value.
Are markets completely efficient? No, and Gene said so in his very first
article. Efficiency, like all perfect-competition supply-and-demand
economics, is an ideal, which real-world markets can only approach.
Empirical work can find only how close to or far from the ideal a given
market is.
Bringing science to
finance
Too much finance is ex post storytelling, with not much more content than
“markets went up—the gods must be pleased.” More than a theory,
efficient-markets was the banner for bringing scientific method to the
study of financial markets. Rather than ask, “What are Warren Buffett’s
three secrets of success?” or interview the latest soothsayer, researchers
started to collect clean data, and examine theories systematically and
objectively. Gene was the leader of this movement, and set the
methodological standard for how academics do empirical research.
Perhaps the best way to illustrate the empirical content of the efficient-
markets hypothesis is to point out where it is false. Event studies of the
release of inside information usually find large stock-market reactions.
Evidently, that information is not fully incorporated ex ante into prices.
Restrictions on insider trading are somewhat effective. When markets are
not efficient, the tests verify the fact. A theory that can be rejected is a real
theory.
These are only a few examples. The financial world is full of novel claims,
especially that there are easy ways to make money. Investigating each
anomaly takes time, patience, and sophisticated empirical skill. One has to
check whether the gains were not luck, and whether the complex systems
do not generate good returns by implicitly taking on more risk.
For nearly half a century, Gene Fama’s efficient-markets framework has
provided the organizing principle for empirical financial economics, and
continues to do so. A new round of studies is examining again the abilities
of fund managers, focusing on new ways of sorting the lucky from the
skillful in past data.
Gene’s bottom line is always: Look at the facts. Collect the data. Test the
theory. Like astronomy, every time we look, the world surprises us totally.
And it will again.
John H. Cochrane is the AQR Capital Management Distinguished Service
Professor of Finance. This piece is adapted from a longer post on his
https://www.chicagobooth.edu/review/eugene-fama-efficient-markets-and-the-nobel-prize 4/7
Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 6 of 8
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Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 7 of 8
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Case
4/27/23, 1:21-md-02989-CMA
8:23 PM Document
Eugene 559-35
F. Fama, Entered
Efficient Markets, andon FLSDPrize |
the Nobel Docket 04/28/2023
Chicago Booth Review Page 8 of 8
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