The New York Times has the story Economists Clash on Theory, but Will Still Share the Nobel.
The two men, leading proponents of opposing views about the rationality of financial markets — a dispute with important implications for investment strategy, financial regulation and economic policy — were joined in unlikely union Monday as winners of the Nobel Memorial Prize in Economic Science.
Now you know the reason that when I publish the views of an economist, I rarely mention that they have won the Nobel Prize in Economics. Of course, if I want to sully the reputation of the Nobel Prize, I will list all the wing-nuts who have won the prize.
In this case, I do not have to go any farther than what The New York Times has just said. (but of course, I just did.)
To put it another way, always remember that a person is great for the greatness of what the person did or what the person said. The person is not to be judged great by the awards that have been given to that person. The great actions or words did not become great because awards were given. If we are lucky, some of the awards came because the action or words proved to be great in the judgment of history. In many cases the Nobel Committee makes the awards long before we know the judgment of history. Yes, I know, the same can be said truthfully about recent awards of the Nobel Peace prize.
What both economists may be missing in their theories is that some actors in the market are acting with criminal intent. One way a con artist succeeds is by hiding information from the pigeon.
We know these people exist and can and do exert tremendous influence on the market. That seems to fly in the face of the efficient market theory as a general rule that holds under all circumstances. It also may temper the idea of irrational behavior in the market. The people pulling the con are acting rationally in their own interests. The people being duped by the con may be acting rationally based on all the information they have. Of course, just as in the case of the efficient market theory applying some of the time, the theory of irrational behavior is also true for some of the people, some of the time.
The trick with any model of human behavior is to know when the model does apply and when it does not apply.
The other way I have put it is that there are many opposing forces acting in the market at all times. The trick is to figure out what are the dominant forces at any particular time.
Sometimes there are two very large forces that oppose each other and almost balance each other out. The slightest miscalculation on the size of one or both of them can lead to huge errors in predicting what will happen. (Think of predicting the outcome in a a game of tug-of-war with a pair of well matched teams.)
As for a statistical method of moments to make up for missing information, one can immediately see the limitations when we are talking about large opposing forces that are nearly balanced.