Fama vs. Thaler: The Tip of an Iceberg, or the Whole Iceberg?

I somehow missed this WSJ piece [no sub required] from back in October that provides a nice overview of recent scuffles in efficient market theory. As the piece points out, efficiency-guy Eugene Fama seems to have softened his views somewhat, while behavioralist Richard Thaler is no less adamant.

Basically the piece comes down to this: How many market participants, or what percentage of traded dollars, has to be irrational before the market itself is no longer efficient? Fama implies that there is only sufficient irrational dollars for that to happen in rare cases; Thaler argues that inefficiencies are much more common than Fama might like. (Thaler is fond of the Palm example from 2000, when then-owner 3Com’s holdings in Palm were worth more than 3Com itself. Fama’s salty rejoinder about the anomaly: “Is this the tip of an iceberg, or the whole iceberg?”)

Who is right? While the momentum right now seems to be on the side of the behavioralists, there is a financial scorecard available: Mr. Fama’s Dimensional Fund Advisors, where he is a director, has $56-billion under management; Mr. Thaler is a principal at Fuller & Thaler, which has merely $2.4-billion in assets. Advantage: Fama — for now.


  1. I’ve always been stumped by the close association of rational expectations and market efficiency. To me, the aggregate behavior of a bunch of irrational people still has a central limit that would lead to an efficient market. The only difference between the two is relative volatility. There are certainly examples of both extremes in the marketplace, as well as everything else in between.

  2. Dimensional was founded in 1981… Fuller & Thaler in 1992? Considering DFA’s decade long head start (during a huge bull market at that), I’d say Fama is lagging F&T, and badly.

  3. Good point — Fuller & Thaler is growing far more quickly than DFA. Then again, F&T is coming off a tiny base, so things will get harder if/when the former crosses the $10-billion market.