The recent paper “Why Indexing works” [1] gives a probabilistic explanation of the futility of the Active process and why Passive Indexing is hard to beat. For every 1000 people who read the Wall Street Journal, maybe 10 read the Bloomberg Markets (BM) magazine and for every 10 who read the last month’s issue of BM maybe 1 read this research paper cited in the article [2]. And you don’t need a geologist to tell you that the chances to dig and find are small. This is why making a mathematical case against the underperformance of the USD 16 trillion plus active market using hypothetical probabilities is not easy.
AI is excited about jumping cats, How come AI can not solve the US 100 trillion investment management which can not beat the benchmark? The answers I got. The cat is important not the benchmark. AI needs to take small steps. Solving Cancer more important than beating the benchmark. Driverless cars more important focus. We don’t have another financial crisis to ask that question.
Standing against the establishment, having a voice and speaking up needs courage. This is what you did. You spoke up against the industry which started the first Mutual Fund in 1775. Bloomberg calls it a revolution, you call it a revolution, Wall Street Journal is calling it differently, but that does not matter. Mutual Funds are in a descent. Stock Pickers might still continue to follow Graham and Dodd approach, but the facts are overwhelming. If an institution can’t beat the index then it is wasting resources.
Adaptive Market Hypothesis (AMH) embraces Efficient Market Hypothesis (EMH) as an idealization that is economically unrealizable, but which serves as a useful benchmark for measuring relative efficiency.
I was in Mumbai recently, meeting fund managers to understand where India was on the smart beta road. How fast was investor education evolving? What was the appetite for ETF’s? And what should be done from the regulation point of view to take the Indian markets to the next stage?
John Rae’s inter-temporal choices explained the statistical nature of human behavior in 1834. However, despite the subject’s insight in the objectiveness of behavior, inter-temporal choices remains a peripheral science. This paper takes a sequential approach to question how inter-temporal choices could be behind human behavior, behavioral anomalies and even market anomalies. If these inter-temporal anomalies were consistent, unarbitrageable and explain asset returns better than the Fama and French Factor model, this could further our understanding of asset pricing models by establishing a new duration factor which could subsume both size and value factors.
In finance, arbitrage is an essential framework to understand asset pricing. However, the study of anomalies also called as premiums, which are not arbitrageable has led to a debate regarding whether markets are efficient in correcting price imbalances or is inefficiency a reality.
Quantum physics may not seem much to have to do with risk and investing, but with subjects like psychophysics explaining the statistical behavior in psychological behavior, it’s just a matter of time that science could explain more of markets. John Gribbin’s biographic work on Schrödinger has a lot of jargon relevant for understanding universal behavior.
Economics is at the soul of everything including big-ticket sports. Now that football is the number 1 sport in the world, the growth might look obvious. But it has taken more than a few decades for football to attain this cult. Was it chance that we reached here to a 1 billion audience, was it smart visionaries that made it happen or was it social behavior?
