Why Nassim Taleb Thinks Leaders Make Poor Decisions

Laurence Articles

Why do experts, CEOs, politicians, and other apparently highly capable people make such terrible decisions so often? Is it because they’re ill-intentioned? Or because, despite appearances, they’re actually stupid? Nassim Nicholas Taleb, philosopher, businessman, perpetual troublemaker, and author of, among other works, the groundbreaking Fooled by Randomness, says it’s neither. It’s because these authorities face the wrong incentives. They are …

She Caught the CATY, and Left Me a Mule to Ride: Improving on Dividend Yield as an Indicator of Stock Valuations and Expected Returns

Laurence Articles

The title of this essay refers to two things: (1) a great Blues Brothers song; and (2) a new measure of market valuation set forth by Philip Straehl and Roger Ibbotson, the CATY or cyclically adjusted total yield. Straehl and Ibbotson [2017] developed the CATY as a substitute for Robert Shiller’s CAPE or cyclically adjusted price-earnings ratio, a measure that …

What Investment Risk Really Is, Illustrated

Laurence Articles

Investment advisors, managers, and their clients talk about balancing risk and return when advising clients about their strategic asset allocation (SAA) policy for the overall portfolio. This is true whether the client is an individual, a pension plan, a foundation or endowment, or a sovereign wealth fund. SAA investment policy or strategy is typically set by choosing from among a …

“Uneasy lies the head that wears a crown”: A Conversation with Jack Bogle

Laurence Articles

On January 8, 2018, I interviewed John C. (Jack) Bogle, the founder of Vanguard, the largest manager of U.S. index funds and the second largest investment management organization in the world. Bogle, born in 1929, founded Vanguard in 1974 and launched the first index mutual fund, designed to track the S&P 500, in 1975. He served as chairman and CEO …

The Age of Experts: A Review of Marc Levinson’s An Extraordinary Time

Laurence Articles

How good were the good old days? Was the post-World War II economic boom in the United States and other developed countries a truly special period, one that we cannot expect to repeat, even over centuries-long time frames? Where did those exceptional growth rates come from, and what—if anything—can we do to bring them back? In An Extraordinary Time: The …

The Unicycling Genius Who Invented Information Theory: A Review of a Mind at Play, by Jimmy Soni and Rob Goodman

Laurence Articles

Where do technological innovations come from? We have two mental images. One is of a lone genius working in a laboratory or garage, misunderstood until, at long last, the world appreciates her contribution. The other is of a team of busy bees, experts working at a corporation or government agency, the Manhattan Project being the best-known example. The life of …

The Rules of Growth: Organisms, Cities and Companies

Laurence Articles

What do living organisms, cities and businesses have in common? They all have organic characteristics: they’re born, grow, sometimes shrink and usually die; they all require energy to maintain and grow; and they all must deal with the sometimes undesirable byproducts of their existence. Do these wide-ranging behaviors follow simple laws that have explanatory and predictive value? Geoffrey West, a …

“They Can Make Everything for Less”: Woody Brock on Why Productivity is Mismeasured and Understated

Laurence Articles

Has productivity growth slowed in the U.S. and around the world, as conventional measurements suggest? Or is that just an illusion, caused by the difficulty of measuring the quality improvements (instead of quantity improvements) that now constitute the bulk of productivity growth? In a provocative interview, Horace (“Woody”) Brock, an economist, strategist and consultant to many of the world’s leading …

The Equity Risk Premium: A Contextual Literature Review

Laurence Articles

The equity risk premium (ERP), or equity premium, is the difference in expected or realized return between an equity index and a reference asset, where the latter is usually a bond or bill portfolio considered to be “riskless.” In the modern literature and in investment management practice, ERP usually means “expected ERP” and we will stick to that convention, reserving …

The Unicycling Genius Who Invented Information Theory

Laurence Articles

Where do technological innovations come from? We have two mental images. One is of a lone genius working in a laboratory or garage, misunderstood until, at long last, the world appreciates her contribution. The other is of a team of busy bees, experts working at a corporation or government agency, the Manhattan Project being the best-known example. The life of …

Woody Brock: Global Growth is Mismeasured and Understated

Laurence Articles

Has productivity growth slowed in the U.S. and around the world, as is the conventional wisdom? Or is that just an illusion, caused by the difficulty of measuring the quality improvements (instead of quantity improvements) that constitute the bulk of productivity growth? In a provocative interview, Horace (“Woody”) Brock, an economist, strategist and consultant to many of the world’s leading …

Fire Marshal in a Nightclub: Richard Bookstaber Explains Financial Risk Management

Laurence Articles

Richard Bookstaber has authored two superbly written and thoughtfully argued books on the flaws of the financial system. His first, A Demon of Our Own Design (2007), was focused on the system’s complexity and foresaw the global financial crisis of 2007-2009. His latest book, The End of Theory, argues that economics as currently understood is poorly designed to understand the …

Index Fund Silliness: Indexing Doesn’t Distort Anything

Laurence Articles

In a burst of silliness, index funds have recently been compared to Communism, called un-American, and regarded as proof of our essentially lazy nature. But those are softballs. In a harder-edged attack, cash flows into index funds have been blamed for pushing the prices of a few favored stocks up to astronomical levels, distorting markets and making indefensible capital allocation …

The Age of Experts: A Review of Marc Levinson’s An Extraordinary Time

Laurence Articles

How good were the good old days? Was the post-World War II economic boom in the United States and other developed countries a truly special period, one that we cannot expect to repeat, even over centuries-long time frames? Where did those exceptional growth rates come from, and what — if anything — can we do to bring them back? In …

Value Investing: Robots versus People

Laurence Articles

Who is better at value investing: robots or people? How have robots — the quantitatively-driven passive funds that hold, for example, low price-to-book stocks — fared against actively managed value mutual funds? A provocative paper forthcoming in the Financial Analysts Journal, “Facts About Formulaic Value Investing,” by U-Wen Kok, Jason Ribando, and Richard Sloan, argues that robots are poor value …

Disruption – Conference Roundup

Laurence Articles

Jimmy Wales, founder of Wikipedia, and Jack Bogle, founder of Vanguard, were among the distinguished speakers at the 2017 Morningstar Investment Conference in Chicago. Both men’s accomplishments have disrupted existing practices in ways that have almost uncountable benefits for mankind. As I’ll demonstrate, each of them has been responsible for two major disruptions. Wales set as his objective the dissemination …

To Hell in a Handbasket? No Way, Says Johan Norberg

Laurence Articles

Is the world going to hell in a handbasket? Are most people getting poorer while the rich get richer? Have we destroyed the planet? In a sparkling — and delightfully short — new contribution to the econo-optimist genre, Johan Norberg, author of Progress: Ten Reasons to Look Forward to the Future, emphatically answers “no.” Consider the following:In 1981, “extreme” poverty …

It Takes a Theory to Beat a Theory, or the Trouble with Tribbles

Laurence Articles

Is the market efficient? Of course not — not exactly, or not even close, depending on your point of view. However, the efficient market hypothesis (EMH), while self-evidently not quite correct, has remained surprisingly resistant to overturning. The reason is that, as MIT professor Andrew W. Lo says repeatedly in his new book, Adaptive Markets, “it takes a theory to …