In the Wall Street Journal’s paid content As Two Economists Debate Markets, The Tide Shifts Bonner Ain’t Misbehaving (scroll half way down) Mandelbrot’s new book The shift in this long-running argument has big implications for real-life problems, ranging from the privatization of Social Security to the regulation of financial markets to the way corporate boards are run. Mr. Fama’s ideas helped foster the free-market theories of the 1980s and spawned the $1 trillion index-fund industry.
Mr. Thaler’s theory suggests policy makers have an important role to play in guiding markets and individuals where they’re prone to fail. Even in an efficient market, bad investments occur. But in an inefficient market where prices can be driven way out of whack, the problem is acute. In its purest form, efficient-market theory holds that markets distill new information with lightning speed and provide the best possible estimate of the underlying value of listed companies. As a result, trying to beat the market, even in the long term, is an exercise in futility because it adjusts so quickly to new information.
Behavioral economists argue that markets are imperfect because people often stray from rational decisions. They believe this behavior creates market breakdowns and also buying opportunities for savvy investors. Mr. Thaler, for example, says stocks can under-react to good news because investors are wedded to old views about struggling companies.
