Transcript from an interview with Eugene F. Fama

Interview with Eugene F. Fama on 6 December 2013 during the Nobel Week in Stockholm, Sweden.

Could you explain your awarded work for young students?

Eugene F. Fama: If I would explain my work, I started back in 1962 working on the general topic is how do prices incorporate new information. It’s called the efficient markets hypothesis, but that’s it basically, how do prices incorporate new information. I devised a lot of tests about how you go about doing that, that’s one branch of asset pricing for which the award was given. The other one is what we call the asset pricing models which are really stories about how you measure risk and then what is the relation between risk and expected return, so they are basically risk return story. Those are kind of the two main branches of asset pricing which I have been working on for the last 53 years.

What were you doing when you got the message of being awarded the Prize in Economic Sciences?

Eugene F. Fama: It was 6 o’clock in the morning so I was doing my back exercises which I do every morning pretty much. I was preparing a class because I had a class later that day, at 9 o’clock actually. Of course, I was surprised by the call, lots of people could get the prize, I was surprised, it was a pleasant surprise. I was kind of chocked, I went in to talk to my wife, I wanted to tell my wife and I told her “Well, you are going to have to go to Sweden” and she said “What for?” and I said “Because I got the Nobel Prize” and she said “No” and I said “Yes”. She said “No”, because the phone didn’t ring in her room, so she didn’t hear it. She thought I was putting her on, but in the end, she started crying.

What brought you to Economic Sciences?

Eugene F. Fama: I started out studying French, I was going to be a French teacher and a sports coach. When I was very young I was very good a sports, my high school’s athletic hall of fame, so I thought that’s what I was going to be. Then I started to get tired of studying languages and I took an economics course and it was a revelation, so that’s what I have been doing ever since. What I tell young people now is “Don’t think you know what you want to do”, because you don’t know all the opportunities that are out there. You have to have a range of experiences before you choose what you really want to do and you better choose something you like because you are going to spend a lot of time at it. If you enjoy it, it makes your life a lot easier and more pleasurable and more satisfying than if you don’t enjoy it.

At what point did you realize your work was a breakthrough?

Eugene F. Fama: From very early, on because there wasn’t anything new, everything was a breakthrough, so it was kind of easy in those days to do new stuff. Nowadays the young people coming along have it much harder because there is huge body of work they have to be familiar with. I didn’t have to be familiar with anything except basic economics and statistics in order to proceed with my work. At that time, the reason it all started at that time is kind of silly because what started it was the fact that computers came and computers made it easy for people to do work with data, that was very difficult to do before that. They had to use these old mechanical calculators that the people watching this have probably never seen in their lifetime. It was very difficult to do things accurately even. Then computers came and they were not as powerful as your cellphone is now, but they were a revelation at that time. All kinds of people got interested in doing work with computers and stock prices are one of the most easily available data that you can get so lots of people started to work on stock prices and returns and that’s where I started too.

Who is your role model, and why?

Eugene F. Fama: My professor, I had two main professors when I was a student, one was Merton Miller, he was a Nobel Prize winner, another one was Harry Roberts, he was a statistician and those two people were my inspiration. I didn’t learn anything in classes at that time. When I started writing my thesis, that’s when I started to really take things into my memory and to work with them and keep them there. Basically, it was one-on-one work with these two people that did it. I was married at 19 and we had one child and one child on the way so that was inspiration, I wanted to finish my thesis pretty quickly so I could get a job.

Can you tell us a little about your work in finance?

Eugene F. Fama: I started before finance was even a real discipline so there wasn’t anything, there weren’t any journals in finance or anything like that, everything was new at that time. It took a while initially before it made its way into practice, but then it was kind of like an explosion, waterfall. It took maybe ten or fifteen years before initially the applied world, the investment world, came around to the new way of thinking, but then when they did, now it’s basically instant so they are looking over our shoulders all the time and now to see what is going on, and see how they can incorporate it into their products. Finance is really very applied as a discipline, the research gets applied very quickly if it works, if it has anything to say.

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