The New Yorker 's John Cassidy has a conducted a series of seven interviews with the famous in finance at the University of Chicago.... in the light of recent events and what they mean for the main thrust of the economics and finance professions. They represent the state of debate amongst the world's top thinkers as of January 2010.

This is an extraordinary treasure trove - Fama, Posner, Becker, Cochrane and the bankers Rajan, Murphy et al. I have gathered all these together and shall post as one paper here then six discussions.

These debates are not for the faint hearted - but they are central to much of what we do. They also represent about three years right up to date financial economics thinking in a concentrated form - as close as it gets to listening in at the Chicago tea room debates.

First: Richard Posner

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Second: Eugene Fama


I met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared.

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Third: John Cochrane

I interviewed John Cochrane in his office at the Booth School of Business, and I began by asking him about the economics of today’s Chicago, and how it differed from the strident free-market school of a bygone era—the Chicago of Milton Friedman and George Stigler.

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Interview Four:Gary Becker

I met Becker in his office at the economics department. I began by telling him I had been speaking with his friend and co-blogger Richard Posner, and I asked whether he agreed with Posner that the events of the past two years had called Chicago School economics into question.

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Interview Five: James Heckman

I interviewed Heckman by telephone in late October. I began by referring to a piece in the University of Chicago Magazine in which he appeared to absolve Chicago economics of any blame in causing the financial crisis.

How did he react, then, to the recent criticisms of Chicago School economics from Joseph Stiglitz, Paul Krugman, and others?

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Interview Six: Kevin Murphy

Kevin Murphy is one of the best-known Chicago economists from the post-Lucas, post-Fama generation. In 1997, he was the recipient of the John Bates Clark Medal, which is presented to the best American economist under forty. Although he is primarily a microeconomist, Murphy has published articles on a wide range of subjects, including income inequality, the value of medical research, economic growth, and unemployment. He wasn’t available to see me when I was in Chicago, but I subsequently talked to him on the telephone, and these are the notes of our conversation.

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Interview Seven: Raghuram Rajan


I met Rajan in his office at the Booth School of Business. I began by asking him about the academic work he and several colleagues at the business school did in the years leading up to 2007 on banking and liquidity. In addition to exploring theoretical issues that turned out to be important, Rajan, in the summer of 2005, issued a prescient warning about the dangers of a financial blowup involving the credit markets.

It was striking, I remarked, that despite Chicago’s image as a bastion of market efficiency, it was also home to much more questioning research in the financial system.

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I have long been a fan of Malkeil.... this interview is him at his best. Thoughtful, innovative and not stubborn or inflexible... but correct!!

By LAWRENCE C. STRAUSS
AN INTERVIEW WITH BURTON MALKIEL: The influential author of the 1973 bestseller; A Random Walk Down Wall Street, again makes the case for low-cost index funds.

AS A YOUNG INVESTMENT BANKER AT SMITH BARNEY in 1959, Burton Malkiel proposed....

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Estrada J has recently undertaken some perhaps obvious but nonetheless interesting empirical investigation of the difference between what we might expect to observe if equity returns are normally distributed versus what has been observed historically (Estrada J "Investing in Emerging Markets: A Black Swan Perspective" IESE Business School 2008, and "Black Swans, Market Timing and the Dow", Applied Financial Economics Letters, forthcoming).

He examines both mature and emerging markets examining 160,000 daily returns across 15 markets for the former and 110,000 daily returns across 16 markets for the latter.

The conclusions, even averaging, are striking:

Mature. Expected number of returns 3 standard deviations or more from the mean upside = 14. Actual observed = 76
Emerging. Expected number of returns 3 standard deviations or more from the mean upside = 10. Actual observed = 62

Mature. Expected number of returns 3 standard deviations or more from the mean downside = 14. Actual observed = 87
Emerging. Expected number of returns 3 standard deviations or more from the mean downside = 10. Actual observed = 49

The evidence is conclusive in respect of tails being fat - notwithstanding provisos about thinly traded days and other possible biases. It is perhaps worth noting that even the observed observations falling beyond three sigma represent only 0.10% of the total events observed for both mature and emerging markets - so for this number of events at least we are dealing in a tiny proportion of all returns and more than 99% do not fall beyond the three sigma point.

Taleb does warn that these events are rare......

This extract from Gary Becker's latest blog entry has a lot of important ideas in it.... it refers to the Madoff scandal / scam:
Gary Becker.... information cascades and ex post wisdom

"The enormous scope of Madoff's swindle raises two obvious questions 1) how could this scheme go on for so long without being exposed, and 2) how could so many sophisticated individuals be taken in by a fund that provided almost no information on how it was able to achieve consistent returns of from 8-13 per cent for many years during both good and bad times?

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