It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time. I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.

People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.

What lessons have you learned from what happened? There’ll be a lot of work trying to figure out what happened and why it happened, but we’ve been doing that with the Great Depression since it happened, and we haven’t really got to the bottom of that.

Back to the efficient markets hypothesis. You said earlier that it comes out of this episode pretty well. Others say the market may be good at pricing in a relative sense — one stock versus another — but it is very bad at setting absolute prices, the level of the market as a whole. What do you say to that? I don’t know what the basis of it is. If they know, they should be rich men. What better way to make money than to know exactly about the absolute level of prices.

So you still think that the market is highly efficient at the overall level too? Yes. And if it isn’t, it’s going to be impossible to tell.

For the layman, people who don’t know much about economic theory, is that the fundamental insight of the efficient market hypothesis — that you can’t beat the market? Right — that’s the practical insight. No matter what research gets done, that one always looks good.

What about the findings that long periods of high returns are followed by long periods of low returns? Now, there is no evidence of that ... The expected return on stocks is just a price — the price people require to bear the market risk. Like any price, it should vary from time to time …. I’ve done a lot of work purporting to show there’s a little bit of predictability in overall market returns, but that branch of the literature has so many statistical problems there’s not a lot of agreement.

Has the advance of all this behavioural stuff ... made you rethink anything? Yes, sure. I’ve always said they are very good at describing how individual behaviour departs from rationality. That branch of it has been incredibly useful. It’s the leap from there to what it implies about market pricing where the claims are not so well documented in terms of empirical evidence. From the article Rational Irrationality in The New Yorker