The new approach to the problem of price variation according Mandelbort, also called the problem of “fat tails”, influenced the work of Eugene Fama. The Mandelbort generalization of the familiar Gaussian random walk earned him bad reviews from Paul Cootner, a professor at MIT. He said that this theory imply that all the previous work in economy are futile.
In 1964, Fama enrolled in the business school faculty at Chicago. His package of efficient markets and fat tails became the major characteristic of the Chicago finance program. Moreover, his course on the very first efficient markets was included in the standard Chicago textbook, The Theory of Finance. The characterization of three level of efficiency by Fama, weak, semi strong and strong became a classic professional reference. But it was still not much a theory.
B for Jamon for numerous grammatical mistakes.
ReplyDeleteAgain, you should be amazed at this section. This is only 45-50 years ago, and yet Fama's assertion — the now commonplace "past performance is no guaranty of future performance" — was unheard of at the time. Until Fama hand collected the data to check whether beating the market was actually possible.
Mehrling forshadows here. He notes that Fama had to choose between CAPM and efficient markets, and chose the latter. It's his results we discussed in class under the heading "The CAPM Is Missing Something". But Mehrling also notes that when put in the same position, Black would jettison efficient markets to preserve the CAPM model.
FWIW: Fama didn't enroll in 1964. This is when he became a faculty member.
P.S. Benoit Mandelbrot passed away a few months ago.