It was here at Yale that was when Alison did a study of Smart Money and they judged smartness by the average score you got on your entrance exam, the SAT exam, not you, they couldn't get it for the individual, they got it for the college they went to. And they found that people who had, by inference, the higher scores did outperform the others. And I think that's very significant. I hate to say it but not everyone is equally intelligent. Saturday's newspaper. Someone is doing it again, it's Mr. David Levine. At this point in the market, when three-quarters of you are predicting a crash as of last Friday, he says how much of your nest egg to put in this stock. All of it. OK. I was kind of shocked to see it. Right now when the market looks so tumultuous, he's telling people, he says Warren Buffett has stated that 90 percent of your portfolio should be in stocks. I'm wondering is that recent, when did Buffett say that? But anyway apparently at some point Buffett said that. He said, Mr. Buffett is too conservative. So I'll stop with that. What I'm trying to convey is efficient markets theory is a, I'll say it again, is a half truth. There are a lot of smart people investing. But a lot of that smartness is devoted to marketing and manipulation of your psychology. And this guy, I don't know, he might be right. In fact it was kind of a thoughtful article, but the sales pitch I thought, was kind of a non-sequitur, if you read the whole article. Why is he so confidently telling you to put everything in the stock market? It's just a gut feeling. Ultimately he's got, and maybe he's well-meaning of the whole thing. I'm not trying to disparage people's ethic, I'm saying it may be well-meaning but the kind of things that get heard are things like this and they tend to drive market. After the efficient markets hypothesis do you think that large stock market crashes like that in 1987 or in 2008, disprove or prove the efficient markets hypothesis? Is this like price is catching up with information, information is catching up with price, how is that? Well one problem, if you look at 1987 or 2000 or 2007, there's only a handful of examples and to disprove a hypothesis you need a lot of data. But on the other hand, people who lived through these crises have often reported that their faith in the markets was diminished by the experience. And I think that maybe what they're referring to is, how it was reading the news every day about these events and talking to people about them. I think the experience of living through a crash makes it obvious that human emotions play a role. And that people were buying and selling who didn't know what was happening. And so I think that it's often a human judgment thing. Having experienced an event like this makes it seem, you know it's kind of crazy to think these markets are perfect. You know I haven't met anyone yet, who is behaving in a completely rational way. How could the combined effect of all their buying and selling be completely rational? Actually going back to Eugene Fama, when he was asked about the 2008 crisis he said that the market behaved really well because prices started to fall in advance of when people accepted there was a recession so the prices were already incorporated in the recession. Right. So, how do you respond to that? So the stock market has been documented, this is known for almost 100 years, as a leading indicator. The stock market has a tendency to fall before a recession. So what do we take of that? Well there's two possible explanations, you could say that the market is smarter than everyone else and it's like a fortune teller and it sees the future. But there's another explanation. You could say that what do you think it is? Is it cause? It causes the recession. So the market goes down and people say what, something's wrong, you know. It's just like if you take your temperature and you find it's low or high and you suddenly think maybe I'm sick and he said maybe I feel a little sick. And when you do that with masses of people it can have that reverse causality. You can also say that the stock market crashed due to like an underlying problem in the housing market. And so with the prices, the stock market crashing is actually a reflection of new information. Right. The market provided, so is that maybe proving the efficient market hypothesis, actually? Well this is something I've been involved in debating for many years. And there's different approaches to answering your question, but one is to say, in any one of these questions, how big was the loss to the economy because of the recession and was the market acting appropriately to that? So for example in 1929 we had the beginning of a stock market crash that bottomed out in 1932. And the market lost over 80 percent of its real value. So wow, that's a big drop, 80 percent. But then people say well but we had the great depression after that. Maybe we did, in fact, we did have the Great Depression but you know what, the Great Depression wasn't that bad. It wasn't anything like an 80 percent drop in GDP. It was temporary, you got over it. People like to tell stories. And they can tell a story that justifies the market as forecasting amazingly, but to me it's just a story.
