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Every December the Royal Swedish Academy of Sciences concludes a 16-month nomination and selection process by awarding the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. The Nobel committee recently recognized work on the Efficient Market Hypothesis with a dramatic splitting of the prestigious prize between EMH pioneer Eugene Fama and EMH critic Robert Shiller. (University of Chicago economist Lars Hansen also shares the $1.2 million prize, but we only briefly had the math chops to understand his work back in the late 1980s; we’re told he is very deserving!) This makes now a great time to review EMH, its history, its controversies, where things stand today — and perhaps make our own small contribution to the discussion.

By way of background, we both got our Ph.D.s at the University of Chicago under Gene Fama and consider him one of the great mentors of our lives and an extraordinary man. This might reasonably worry a reader that we are very biased. But for the past 20 years, we’ve also pursued investment strategies we think are at least partly explained by market inefficiencies. We pursued these through the Asian crisis in 1997, the liquidity crisis of 1998, the tech bubble of 1999–2000, the quant crisis of August 2007, the real estate bubble and ensuing financial crisis culminating in 2008 and (for Cliff) the New York Rangers’ not making the National Hockey League playoffs for seven years in a row, starting in 1997. Throughout this experience we have more than once come face-to-face with John Maynard Keynes’s old adage that “markets can remain irrational longer than you can remain solvent,” a decidedly folksier and earlier version of what has come to be known as the limits of arbitrage — a concept we will return to in this article. We could arrogantly describe our investment strategies as a balanced and open-minded fusion of Fama and Shiller’s views but admit they could also be described uncharitably as “risk versus behavioral schizophrenia.”

All of this has put us somewhere between Fama and Shiller on EMH. We usually end up thinking the market is more efficient than do Shiller and most practitioners — especially, active stock pickers, whose livelihoods depend on a strong belief in inefficiency. As novelist Upton Sinclair, presumably not a fan of efficient markets, said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” However, we also likely think the market is less efficient than does Fama. Our background and how we’ve come to our current view make us, we hope, qualified — but perhaps, at the least, interesting — chroniclers of this debate.