Morningstar Magazine - December 2017/January 2018 - 62

Investors

Ritholtz: Every word?

Thaler: Every word-several times. I've written
papers with each of them, and we more or less
used the same method.
Ritholtz: You had a cameo in the movie version of Lewis'
book The Big Short.

Thaler: You finally got to my crowning achievement.

capable of memorizing lines, but he comes from
an improv background.

the median would be closer to me than to Merton
Miller or John Cochrane.

Ritholtz: So, just wing it?

Ritholtz: Every time I open The Wall Street Journal,
I see an article about how expensive stocks are.
How do we deal with bubbles and busts? Is it
something we just have to accept as inevitable, or are
we ever going to get past the boom-bust cycle?

Thaler: Everything you heard me say in that movie
is stuff I made up.

Bubbles and Busts

Ritholtz: First, are you and Selena Gomez still dating?

I have to ask that question.

Ritholtz: Let's talk a little bit about EMH. You had

Thaler: No, you know, my granddaughter keeps
me posted on Selena Gomez, and apparently she's
dating somebody whose name is The Weeknd.
That's all I know about it.

previously said we don't want to throw away
the efficient market hypothesis. We just don't want
to believe it's true. Explain that.

Ritholtz: What was the experience like doing The Big
Short? That had to be a lot of fun.

Thaler: Well, it was fun. They called me on
a Monday. They're filming the following Monday.
We don't know how many people had said
no at that point. They sent me the script, and I said,
no, I can't do this. Because if you remember
that scene [with Selena Gomez], it's at a
blackjack table, and it's trying to explain the idea
of a collateralized debt obligation. And
I can tell you Selena Gomez is delightful but
does not know what any of those three
words mean.
Ritholtz: She would not have been a derivatives trader

Thaler: The efficient market hypothesis, like many
economic theories, is an idealized view of the
world. In a world of econs, the efficient market
hypothesis would be true. So, it's useful-
just like the theory of the firm is the right formula
for how to maximize profits. It's good to know
that. It doesn't really explain what real firms
do. The efficient market hypothesis doesn't explain
what markets do. But I would certainly teach it.
If somebody was foolish enough to have me teach
a basic course in finance, I would teach them
the efficient market hypothesis, and then I would
say this is what I call a normative model-
a model of the way the world should be. Then, I'd
go into what actually happens-stuff like
we were talking about before, weird things like
ticker symbols mattering.

had the acting or singing thing not worked out?

Thaler: No, I don't think we will. If you need
something to make you even more scared than you
are now, during the tech bubble, when I would
speak to a conference like this-I probably
did this at some Morningstar conference 20 years
ago-I'd give people a list of five tech stocks
and ask, "What do you think the intrinsic value of
that portfolio is?" The average answer was "50
cents on the dollar." Then I'd ask, "What do you
predict will happen over the next six months?" The
average answer was "up 20%." Now, that's a
bubble. Right? If people think stocks are priced at
2 times and are going to go up. My buddy Bob
Shiller has been asking a version of that question
for 25 years: Is the market fairly priced, and
what's going to happen? I call it the exuberance
delta, and the exuberance delta is at a record high.
Ritholtz: What about Shiller's CAPE? It's been

saying the market is overvalued, but it's been mostly
saying the market's overvalued since 1993.

Thaler: Yes. So, Bob is a pessimist.
Ritholtz: As opposed to Siegel.

Thaler: No. Amusingly enough, she didn't know
the rules of blackjack. So, in the script, the
first hand, she gets dealt 21, and she doesn't react.
Afterwards I said, "No, Selena, this is good.
You win." So, I should get partial directing credit.

Are you considered a heretic at University of Chicago?
I think at this point they know you're not going
to burn the place down, but early on, there had to be
some pushback to your critical work.

So, Friday at noon, I had said no, at which point
the producers are all freaking out because
they're paying Selena a lot of money-not me.
In the end, Adam McKay, the writer-director,
and I agreed that we would rewrite the
script Sunday night. And then it turns out I'm not

Thaler: Yeah, but it's changed a lot. I've been
here 21 years. When I arrived, Merton Miller took
behavioral finance personally.6 He basically
wouldn't speak to me. He wouldn't look at me. But
he was the only one. Gene Fama's always
been friendly.7 If we could estimate the median
opinion of the people in the finance group,

Ritholtz: You're at essentially ground zero for EMH.

Thaler: As opposed to Jeremy Siegel, who's
an optimist. Bob is a worrier. That's constant. But
he worries more at some times than others,
and I would say he's more worried now. I think we
all should be worried that the combination
of the high prices and the infinitesimal volatility,
given what we see in the news every day,
is just a little hard to understand. You would think
that we're in a risky period, wouldn't you? K

6 Merton Miller won the Nobel Memorial Prize in Economic Sciences in 1990. Wrote Cass Sunstein in his review of Thaler's book Misbehaving: The Making of Behavioral Economics, "When
[Thaler] was appointed at the University of Chicago, Nobel laureate Merton Miller, one of the university's great figures, did not conceal his displeasure. Asked why he did not block
the appointment, Merton could only respond, 'Each generation has got to make its own mistakes.'" (Sunstein, C.R. 2015. "The Mischievous Science of Richard Thaler," The New Rambler.)
7 Gene Fama won the Nobel economic prize in 2013 with Robert Shiller and Lars Peter Hansen. Says Thaler, "Gene and I know enough to mostly not talk about finance on the golf course.
In academia, you learn to get along with people who have different beliefs. It's just like getting along with somebody with a different religion. It's possible."

62

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