Learn lessons of Nobel laureates

OCT 20, 2013
Eugene Fama and Robert Shiller might not be household names, even among financial advisers, but they should be. They were among the three economists awarded the Nobel Prize in Economic Sciences last week for their analysis of asset prices. Mr. Fama most famously elucidated and championed the theory that financial markets are efficient and stock price movements are unpredictable. As such, active money managers theoretically can't outperform indexes. Mr. Fama's work has underpinned the growth of passive investing generally and index investing specifically. According to Bloomberg News, at the end of last year, passive investments between exchange-traded funds and mutual funds had more than $2.6 trillion in assets. Mr. Shiller, on the other hand, espouses a somewhat opposing view. A behavioral economist, he believes that markets are largely driven by human psychology, not information, and as such, large mispricings aren't necessarily uncommon and shouldn't be surprising. Mr. Shiller's thinking led him to predict the dot-com bubble in technology stocks. More recently, in 2005, he warned that housing prices were reaching irrationally exuberant levels. We all know how that turned out. The third recipient was Lars Peter Hansen, who developed a widely-used method of statistical analysis to test other theories of pricing movements. “The laureates have laid the foundation for the current understanding of asset prices,” the Royal Swedish Academy of Sciences said in its statement announcing the winners. These aren't ivory tower hypotheses that economists banter about but real-life theories that have been observed in the markets. And they continue to drive debate among other economists, portfolio managers and market strategists. As such, advisers should be familiar with the works of the Nobel laureates, at least those of Mr. Fama and Mr. Shiller, because it is likely that the research that won them the Nobel Prize directly influences some, if not all, of the investment products and strategies advisers use.

Latest News

Americans can only afford to live to 83, survey finds
Americans can only afford to live to 83, survey finds

Retirement savings gap widens as clients underestimate nursing home costs by nearly half.

Advisor moves: Ohio RIA managing nearly $1B joins Osaic for succession planning
Advisor moves: Ohio RIA managing nearly $1B joins Osaic for succession planning

Aurora-based Beacon Financial Group selects broker-dealer’s Empowered Independence channel to secure its next chapter.

Turning Wealth into Retirement Income: Insights from Leading Financial Advisers
Turning Wealth into Retirement Income: Insights from Leading Financial Advisers

In this InvestmentNews TV panel, leading advisors discuss longevity risk, retirement income planning, withdrawal strategies, healthcare costs, and the mindset shifts retirees need to enjoy the wealth they've worked so hard to accumulate.

Advisor moves: Raymond James lands $700M Truist duo in Florida
Advisor moves: Raymond James lands $700M Truist duo in Florida

&Partners has also added a $357 million Texas family practice, while Janney recruits a $250 million Edward Jones advisor in Miami

Wirehouse moves: JPMorgan taps Merrill veteran for Southeast role as BofA beefs up OCIO team
Wirehouse moves: JPMorgan taps Merrill veteran for Southeast role as BofA beefs up OCIO team

Linda Patel will lead J.P. Morgan Advisors in Florida and Georgia as Bank of America adds nonprofit specialists in New York

SPONSORED Built on insurance experience to deliver on long-term promises

Knighthead Life entered the market with a competitive MYGA. A strong launch earned advisor confidence and paved the way for FIAs.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor