, Columnist
When to Send an Investing Model Into Retirement
A market theory that needs constant revisions to keep up with reality has outlived its usefulness.
Do I look worried?
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Here’s a maxim for life as a famous economist: If your theory wins a Nobel Prize, look out -- it might already be running into big problems. When the Black-Scholes-Merton option-pricing model won the prize in 1997, it had already required some major tweaks to fit new data; a decade later, it was being blamed for the financial crisis. By the time the real business cycle theory won in 2004, economists were already showing why it wasn’t a good explanation of recessions.
In 2013, Eugene Fama won the Nobel for his work on the efficient markets theory. Should he be worried?