This was remarkable in that according to the efficient-market hypothesis, it is only changes in fundamental factors, for instance profits or dividends, that ought to affect share prices. Further studies later in the 1980s indicated that future developments can be explained by historical price movements. A look at the share prices of two groups of firms – extreme losers and extreme winners – reveals that the group with the worst share performance in the first period gives a better return in the coming five years than the group that did best and vice versa. In the second period the undervalued shares recovered their fundamental value and the overvalued fell correspondingly. Studies with a shorter horizon confirm that shares which have begun to rise continue to do so and conversely, shares which have started to fall often continue to do so in the short run. The intuitive  1  Markowitz, H.M. (1952), Portfolio selection, J. of Finance, VII:1 (March), pp. 77–91. 2  Fama, E. (1970), Efficient capital markets: a review of theory and empirical work, J. of Finance 25, pp. 383–417. 3  This point has been made by, for instance, Milton Friedman and Eugene Fama; see Friedman, M. (1953), The case for flexible exchange rates, in Essays in Positive Economics, University of Chicago Press, and Fama, E. (1965), The behavior of stock market prices, J. of Business 38, pp. 34–106.
Given a well-established measure of this kind (with a status equivalent to that of the consumer price index, for instance), financial products ranging from forward traded instruments to loan agreements with terms based on a real-estate index, would enable households, for a reasonable sum, to reduce exposure to the risk of a large fall in property prices. This process is already under way. Banks have made varying progress in their customer orientation. Independent financial consultants have also begun to some extent. Increasingly composite financial products are being constructed and distributed. The range of mutual funds offered by banks includes funds owned by others. So perhaps one can say that the development towards more consumer orientation has already begun but the decisive steps still lie ahead. Re-regulations of the financial system, perhaps accompanied by amended tax regulations, may be needed, of course, to produce the course Merton points out but there is also a need for new structures in the financial system. Another requirement is appreciably more knowledge about how, for example, the systems’ productive components can identify and spread the risks that may have to be taken. Still, I am sure you will agree that this opens up new and truly interesting perspectives for the future in many fields of the life cycle as well as for the development of the financial system. Such a development might also lead to some savings finding their way back to the financial institutions and to markets being dominated by more professional players.