Eugene Fama on Modern Finance

Boy. It's much more difficult to start today than when I started. When I started, there was nothing in finance. There was literally nothing. So anything that you did was new. It was easy. It's like shooting fish in a barrel. I was really the first big user of computers in finance. They would suggest something and I would come back the next day and have it done and they were wondering how I could do that. When computers came along, you knew if your program was right, the numbers were right. You didn't have to do it again. So that was an opening of the world to statisticians. That's really how stock prices and efficient markets started. Statisticians and economists were released from the burdens of these calculators. They could process data in ways they couldn't do it before. What's the most easily available data? Stock prices. The ultimate goal was to learn something from the data so it's not whether or not your model looks better or worse. It's whether in going through the process you learn something from the data that is, in fact, true. It reproduces in other data and that's kind of been the organizing philosophy of my approach to empirical research for the whole 50 years of my career. The reactions of academics, they've been pretty supportive. There's been somewhat, to put it mildly, more reticence among the applied people in finance and from Wall Street, basically because it says they don't do very much. They don't like that given that they charge high fees for not doing very much. Another example of beating something to death is the Fama-French '92 paper, which started all of this value-growth business or at least was the most influential paper in that. When we wrote that paper, we didn't even think it would be published because there was nothing in it that was strictly new. We were just putting together stuff that people had done and said, "When you look at all of us this together, the story is just too strong. The old model is no good. We need a new model." And for whatever reason, maybe it was because the model we were throwing down was one that I had helped to build up. If there are smart active managers making money they have to be making money at the expense of poor active managers because passive managers are out of the game. They don't respond to the actions of active managers. That's not a hypothesis. That's arithmetic. That has to be true. Every point in time it has to be true. It's the most fundamental proposition about active management you can have. Bill Sharpe calls it the arithmetic of active management just to emphasize it. It's not a hypothesis. It's arithmetic, and it's the toughest concept to get people to swallow. It's like, you can't get them to swallow that one plus one is two, basically. It's mind-boggling.