Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

other information related to today's conversation. Our email address is mail at econtalk.org. We'd

love to hear from you. Today's January 17th, 2012, and my guest is Eugene Fama, the Robert

R. McCormick Distinguished Service Professor of Finance at the Booth School of Business at the

University of Chicago. Gene, welcome to Econ Talk. Thank you. My pleasure. Your impact on the field

of finance has been immense, particularly in a whole bunch of areas, but one that stands out

is the Efficient Markets Hypothesis. I'd like you to sketch out the evolution of that idea in the

field, how it was understood initially, and how it has changed over time. Well, four or five

hours, but let's try to keep it under 10 minutes for this first question if you can. Okay, I'll go

back to the beginning, at least the way Harry Roberts tells it, Hobart working in the 30s,

started to become interested in whether speculative prices moved randomly. So he's mostly an

agricultural economist who is looking at agricultural commodities, and he took a series of random numbers,

humiliated them, and brought them to his faculty at Stanford in the faculty lounge, I guess.

Showed them to them, and they agreed they were agricultural theories. So he started from that,

that maybe a random walk kind of model would work pretty well for agricultural prices, prices of

other commodities. So, but then there was a good gap from there to like the end of the 50s,

and what opened things up was the coming of computers, which made computations much easier,

and the most readily available data was stock price data. So basically, statisticians,

econometricians, took the data, and started doing calculations on it, and they were calculating

auto correlations, which are estimates of how predictable returns are based on the past returns.

...