A short conversation with Prof. Fama by Xing Zong(1)
Recently, Xing Zong, a Chinese graduate student at Duke University and a freelance writer for China.com, took an exclusive interview with Prof. Eugene Fama from University of Chicago.
About Prof. Eugene Fama Eugene Fama is the Robert R. McCormick Distinguished Service Professor of Finance at the Graduate School of Business at the University of Chicago. He is most often thought of as the father of efficient market theory. In a ground-breaking article in the May, 1970 issue of the Journal of Finance, entitled Efficient Capital Markets: A Review of Theory and Empirical Work, Fama proposed crucial concepts that have defined the conversation on efficient markets ever since.
Prof. Fama is among the most prolific and cited of America's researchers. He focuses much of his study on market prices and implications for portfolio management. Prof. Fama has written a number of influential books. His book Foundations of Finance is the classic book for finance graduate students. His 1972 book The Theory of Finance was co-authored with Merton H. Miller, who won the Nobel Prize in Economics in 1990.
Prof. Fama is also an advisory editor of the Journal of Financial Economics and a fellow of the Econometric Society and the American Academy of Arts and Sciences. Awarded the Chaire Francqui (Belgian National Science Prize) in 1982, Professor Fama was also granted honorary law degrees by the University of Rochester and DePaul University. An active windsurfer and mountain biker, he was recently inducted into the Malden (Mass.) Catholic High School Athletic Hall of Fame.
Professor Fama received his Ph.D. degree from the University of Chicago in 1964. He also holds an MBA from the University of Chicago and a B.A. from Tufts University.
Interview
Z: Prof. Fama, it is my great honor to speak with you. Your first taste of financial market was when you were doing an undergraduate project in Tufts. How did that “beat the market” feeling affect your future career? F: My trading systems worked on the data used to develop them but not on other data. I slowly came to realize that there is something wrong with the whole idea of trading systems that can systematically beat the market.
Z: Your Ph.D. thesis “The Behavior of Stock Market Prices” provoked a stir among academic world. Did you expect that? How confident were you about your theory back in 1964 in University of Chicago? F: No. I am always surprised when my work creates a stir, and I had no experience back then so I was really surprised.
Z: In retrospect, efficient market theory must be your greatest academic accomplishment. What have been the practical consequences of the propositions for the investment management? F: Passive management is now a common approach to investing. It did not exist in 1963.
Z: Word on the street is that after the models of Markowitz, Sharpe, Black & Scholes model, Modigliani-Miller theorem, Ross and you, nothing really exciting happened in finance area. Let me take physics as an analogy, after Quantum mechanics and Einstein’s General Relativity, no major theoretical breakthroughs have been made. Do you think it is true? F: Consumption based asset pricing models have been a big innovation. And I like the Fama-French three-factor model (developed in 1993). There is also good stuff in corporate finance. Keep in mind, though, that finance didn’t exist prior to Markowitz and Modigliani-Miller, so it is normal that there was a spurt of really important stuff.
Z: Let me keep pushing on this topic. What is the future of finance? F: The future of a research area is never predictable.
Z: The theory is to practice what soul is to body. Prof. Fama, you gain the reputation from both your theory and your empirical work. But we also know many financiers overlook the theory while just heavily rely on their own experience. My question is, do you think theories provide added value to practice?
