Financial advice and investment decisions

Extensive research has established that most investors would be better off financially if they invested in passive index mutual funds or exchange-traded funds ETFs rather than actively ma

Financial Advice and Investment

Decisions

Focus on Value: A Corporate and Investor Guide to Wealth Creation by James L Grant and James A Abate Handbook of Global Fixed Income Calculations by Dragomir Krgin

Managing a Corporate Bond Portfolio by Leland E Crabbe and Frank J Fabozzi

Real Options and Option-Embedded Securities by William T Moore

Capital Budgeting: Theory and Practice by Pamela P Peterson and Frank J Fabozzi

The Exchange-Traded Funds Manual by Gary L Gastineau

Professional Perspectives on Fixed Income Portfolio Management, Volume 3 edited by Frank J Fabozzi Investing in Emerging Fixed Income Markets edited by Frank J Fabozzi and Efstathia Pilarinu

Handbook of Alternative Assets by Mark J P Anson

The Global Money Markets by Frank J Fabozzi, Steven V Mann, and Moorad Choudhry

The Handbook of Financial Instruments edited by Frank J Fabozzi

Collateralized Debt Obligations: Structures and Analysis by Laurie S Goodman and Frank J Fabozzi Interest Rate, Term Structure, and Valuation Modeling edited by Frank J Fabozzi

Investment Performance Measurement by Bruce J Feibel

The Handbook of Equity Style Management edited by T Daniel Coggin and Frank J Fabozzi

The Theory and Practice of Investment Management edited by Frank J Fabozzi and Harry M Markowitz Foundations of Economic Value Added, Second Edition by James L Grant

Financial Management and Analysis, Second Edition by Frank J Fabozzi and Pamela P Peterson

Measuring and Controlling Interest Rate and Credit Risk, Second Edition by Frank J Fabozzi,

Steven V Mann, and Moorad Choudhry

Professional Perspectives on Fixed Income Portfolio Management, Volume 4 edited by Frank J Fabozzi The Handbook of European Fixed Income Securities edited by Frank J Fabozzi and Moorad Choudhry The Handbook of European Structured Financial Products edited by Frank J Fabozzi and Moorad Choudhry The Mathematics of Financial Modeling and Investment Management by Sergio M Focardi and Frank J Fabozzi Short Selling: Strategies, Risks, and Rewards edited by Frank J Fabozzi

The Real Estate Investment Handbook by G Timothy Haight and Daniel Singer

Market Neutral Strategies edited by Bruce I Jacobs and Kenneth N Levy

Securities Finance: Securities Lending and Repurchase Agreements edited by Frank J Fabozzi and Steven

V Mann

Fat-Tailed and Skewed Asset Return Distributions by Svetlozar T Rachev, Christian Menn, and

Frank J Fabozzi

Financial Modeling of the Equity Market: From CAPM to Cointegration by Frank J Fabozzi, Sergio M

Focardi, and Petter N Kolm

Advanced Bond Portfolio Management: Best Practices in Modeling and Strategies edited by

Frank J Fabozzi, Lionel Martellini, and Philippe Priaulet

Analysis of Financial Statements, Second Edition by Pamela P Peterson and Frank J Fabozzi

Collateralized Debt Obligations: Structures and Analysis, Second Edition by Douglas J Lucas, Laurie S

Goodman, and Frank J Fabozzi

Handbook of Alternative Assets, Second Edition by Mark J P Anson

Introduction to Structured Finance by Frank J Fabozzi, Henry A Davis, and Moorad Choudhry

Financial Econometrics by Svetlozar T Rachev, Stefan Mittnik, Frank J Fabozzi, Sergio M Focardi, and

Teo Jasic

Developments in Collateralized Debt Obligations: New Products and Insights by Douglas J Lucas,

Laurie S Goodman, Frank J Fabozzi, and Rebecca J Manning

Robust Portfolio Optimization and Management by Frank J Fabozzi, Peter N Kolm,

Dessislava A Pachamanova, and Sergio M Focardi

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimizations by Svetlozar T Rachev,

Stogan V Stoyanov, and Frank J Fabozzi

How to Select Investment Managers and Evaluate Performance by G Timothy Haight,

Stephen O Morrell, and Glenn E Ross

Bayesian Methods in Finance by Svetlozar T Rachev, John S J Hsu, Biliana S Bagasheva, and

Frank J Fabozzi

Structured Products and Related Credit Derivatives by Brian P Lancaster, Glenn M Schultz, and Frank J Fabozzi Quantitative Equity Investing: Techniques and Strategies by Frank J Fabozzi, CFA, Sergio M Focardi,

Petter N Kolm

Mathematical Methods for Finance: Tools for Asset and Risk Management by Sergio M Focardi, Frank J

Fabozzi, and Turan G Bali

Financial Advice and Investment

Decisions

A Manifesto for Change

JARROD W WILCOX FRANK J FABOZZI

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or ted in any form or by any means, electronic, mechanical, photocopying, recording, scan- ning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web

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to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may

be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss

of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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To my lifelong partner, Linda Wilcox

FJF

To my beautiful wife, Donna,

and my children, Francesco, Patricia, and Karly

Preface xiAcknowledgments xiiiAbout the Authors

CHAPTER 3

The Extended Balance Sheet Approach to Financial Planning 25

CHAPTER 4

CHAPTER 5

CHAPTER 6

CHAPTER 7

CHAPTER 8

Context 121

CHAPTER 9

CHAPTER 11

CHAPTER 12

CHAPTER 13

APPENDIX A

APPENDIX D

Taking Initial Investments and

References 311Index 321

making They begin with the saving and investment decisions of vidual investors It is for their benefit that we undertook this book How-ever, we also see attractive possibilities for profitable innovation focused

indi-on customer needs in the business models and practices of many financial organizations Paradise may be just around the corner if we can also help governments to further encourage better quality financial services, more pre-cautionary saving, and reduce the frequency and impact of financial crises Well, maybe not But we do believe each improvement in financial advice helps build a foundation for further progress

We know we are nowhere near what can be accomplished

Late in 2008, Bernie Madoff was arrested for operating a purported

$50 billion dollar Ponzi scheme It was big news in the United States and worldwide Victims were swindled because they were not able to evaluate the credibility of steady monthly returns amounting to a reported 10% to 12% a year That ability to evaluate could have been a requirement for graduating from college, if not high school

Extensive research has established that most investors would be better off financially if they invested in passive index mutual funds or exchange-traded funds (ETFs) rather than actively managed funds, leaving attempts

to beat the averages to exceptional professionals Yet hundreds, if not thousands, of low-quality funds persist, reducing the ability of investors to properly save for retirement Even large pension funds, banks, and insur-ance companies are not exempt from serious flaws in investment policies

We think that quality is likely to improve, but progress has been slow, and should be sped up

At the same time as the collapse of the Madoff scheme, a vastly larger group of investors and businesses was undergoing the pain of a worldwide financial crash It revealed too much debt, poor lending criteria inflamed

by conflicts of interest, misunderstood financial derivative products, lack of transparency, and too much reliance on third parties for credit evaluation These symptoms shared the same underlying diagnosis—a curable inability

to evaluate the quality of financial advice

We even see hope for better government legislation and regulation if more people in government take to heart some useful facts about the invest-ment world—things like the impact of leverage on systemic risk It is really not rocket science.

Bad financial advice is not usually intentionally deceptive In many instances, we are merely subjected to poorly informed, overconfident or unconsciously biased advice givers It is not limited to us as individual investors It plagues brokers, pension fund trustees, bank managers, hedge fund managers, government regulators, and most everyone involved with financial products and services We see considerable hope, however, in the increasing service opportunities created through the evolution of the Inter-net Most people will still want the help of a trusted adviser, but improving the ability of customers to evaluate the quality of what they are getting can free advisers to do what they do best Good advice is available, but it needs

an audience educated to appreciate it

We recognize that our book will not appeal to everyone It takes erable effort to form new habits—whether in saving, investment, business, teaching, or governing All we offer are some key facts, some small concep-tual models to help you think about financial problems, and a little advice from our experience It is up to you to do the rest

consid-Jarrod W WilcoxFrank J Fabozzi

We would like to acknowledge Mark Rubinstein, Professor Emeritus

of Finance at the Haas School of Business at the University of California–Berkeley, who provided helpful confirmation that the discretionary wealth model introduced in Chapter 5 was derivable from his much earlier work on generalized logarithmic utility

We are grateful to the following individuals for their insightful ments on Chapter 13, namely, Russell Fogler, Sergio M Focardi, Martin Fridson, and M Barton Waring

Jarrod Wilcox is President of Wilcox Investment, Inc., a registered ment advisor since 2002 serving families His previous investment expe-rience included institutional money management at Panagora Asset Man-agement, Batterymarch Financial Management, and Colonial Management Associates Prior to entering the investment field, he was an assistant pro-fessor at MIT’s Sloan School and a consultant with the Boston Consulting Group Dr Wilcox is the author or coauthor of several books on investing, and recently founded Wealthmate, Inc to provide Internet financial services

invest-He received his S.B., S.M., and Ph.D degrees from the Massachusetts tute of Technology and is a Chartered Financial Analyst

Insti-Frank J Fabozzi is Professor of Finance at EDHEC Business School and

a member of the EDHEC Risk Institute Prior to joining EDHEC, he held various professorial positions in finance at Yale and MIT In 2013–2014

he held the position of James Wei Visiting Professor in Entrepreneurship

at Princeton University Since the 2011–2012 academic year, he has been a Research Fellow in the Department of Operations Research and Financial Engineering at Princeton University A trustee for the BlackRock family of closed-end funds, Professor Fabozzi has authored and edited many books in asset management and quantitative finance The CFA Institute’s 2007 recipi-ent of the C Stewart Sheppard Award given “in recognition of outstanding contribution to continuing education in the CFA profession,” he earned an M.A and a B.A in economics in June 1970 from the City College of New York and elected to Phi Beta Kappa in 1969 He earned a Ph.D in Econom-ics in September 1972 from the City University of New York Professor Fabozzi holds two professional designations: Chartered Financial Analyst (1977) and Certified Public Accountant (1982)

1

Why Do We Need Better

Financial Advice?

yet perfectly adapted even to the uses of money We have inborn instincts for success within family and small groups, but success within money-based economies is far less natural A competitive public market-place for legal documents such as stocks, bonds, and derivative instru-ments is even more “unnatural” than trading for goods and services using money Many look with disdain on the accumulation of money through financial markets This further discourages us from its mastery, especially from competence in those skills—such as reasoning with probabilities and treating shared beliefs with skepticism—that we associate with gambling and speculation The financial environment seems too complex for real comprehension, and we fall back on ancient behavioral mechanisms that economists, who like to think of themselves as scientists battling the forces

of superstition, term “irrational.”

In this short introductory chapter, we meet the financial enemy, and he

is us All of us need better financial advice —and some of us should share

it To motivate our book, we need only illustrate financial decisions we see frequently in practice We start with the individual investor, move on to organizational influences, and finally touch on our government, at least as exemplified in the United States Opportunities for better financial decision making, better financial advice, and better financial laws and regulations will be obvious In the following chapters, we support our view in depth and

go on to make specific recommendations

When we refer to the financial decision maker as “you,” we realize,

of course, that you would never make all the mistakes we now describe But put yourself into this picture, and you might be surprised to see how well some of it fits We illustrate this with an unduly confident investor, but overly cautious investors make mistakes of their own

THE INDIVIDUAL

You are 23 and are just beginning your first serious full-time job Do you save part of your paycheck? You may live for another 60 or 70 years, or more, and will want to have an acceptable income throughout Yet, the im-age of those far-off spending needs pales in comparison with today’s desires

So, do you stop to calculate the very positive effect of an early financial savings stream on your well-being decades from now? Not likely You are ripe for bad financial advice, not from professional advisers, or even from the financial media, but from consumer advertising: “It is good to spend on better cars, on better clothes.” In the succeeding years, this message will be directed toward a more upscale vacation and a bigger house You may think spending is even patriotic because it helps the economy You save very little, losing the opportunity to benefit from the compounding of returns on sav-ings and investment over long periods

Now move forward in time You are 30, have married, and you and your spouse have a first child You want to buy a house large enough for a growing family and in a good school district Fortunately, the government has a pro-gram that requires a very low down payment, which is a great deal because house prices have increased fairly steadily for many years Despite your lack

of collateral and savings, your bank is happy to give you a mortgage

Later, you are 40 years old, have advanced your career, and met some

of your family responsibilities You want to begin to build retirement ings You are planning for retirement in another 25 years How much of your savings, that is, your investment portfolio, should you put into stocks

sav-as opposed to bonds and other financial sav-assets? How much of your folio should you allocate to asset types with different risk characteristics? Nobody knows the future with certainty, but you see that stocks have done well in the last 10 years You want to put most of your funds into things that have demonstrated good returns

port-On the other hand, how much risk can you tolerate? Based on filling out

a broker questionnaire, you decide that you can handle stock market ups and downs so long as they are not too bad

Moving forward again, and looking back from age 50, you ber going through a horrendous time when the stock market crashed You sold all your stocks at just the wrong time because, subsequently, the stock market recovered, leaving you safe but with not much to show for the last decade of investing

remem-You decide now that you need better financial advice But to whom should you listen? Your best friend recommends an adviser The adviser asks how much you want to spend in retirement, and you provide that informa-tion Then the adviser evaluates your savings plan and current investments,

and tells you that you will not have enough to absolutely assure that much future spending However, if you invest wisely, and take a little risk, your returns should be about 8% a year, which is what big pension plans assume, and that will meet your retirement spending plan.

You and your adviser also agree on an investment plan You are going

to do your part You have been successful in business so far, and although your investing has had its share of disappointments, you believe you have learned from them You can certainly do better than an index fund, and you

have your adviser pick some mutual funds with great records in which to invest part of your savings You urge your adviser to pick the best manager

of the available choices in each category

At age 55, you realize that maybe you were not so great at stock ing The problem seems to be that the strategies you had read about did not always work Your adviser wasn’t so great, either The high fees on the mutual funds selected by your adviser would not have been bad if the funds had con-tinued their prior good performance, but you discover the funds did not do even as well as an index fund Concerned that you had put your faith in the wrong person, you find a better adviser who had done much better over the last five years

pick-In the years until you reach age 60, the economy does fine and the stock market moves to new highs The new adviser does well, too, with selections that go up even more than the market Your bonds are a bit of a drag, so you begin allocating more to stocks

At 65, you retire You ask your adviser, “How much can I afford to spend a year when I retire?” The financial adviser responds, “Each year, take 4% of what you start with at retirement That has almost always worked.” That doesn’t sound too bad, though you were hoping for at least 5% You are in great health, so you and your spouse are planning to do a lot of outdoor activities and travel

At age 70, your conventional investment funds are no longer quite able

to supply you with your planned income on a sustainable basis There was a financial crisis, followed by years of near economic depression You had fol-lowed the 4% spending rule, but it was a little too aggressive with the lower returns, higher taxes, and the inflation that followed the years of economic trouble as the government found itself under too heavy a debt burden So you

1An index fund is a fund that provides broad market exposure to an asset class such

as stocks or bonds The fund manager does so by investing in a portfolio that is constructed to match the performance of some market index The market index in the case of stocks can be, for example, the Standard & Poor’s 500 Index Investing

in index funds is referred to as “passive investing” The pros and cons of passive investing versus “active investing” is the subject of Chapter 10.

take the advice of your adviser, who suggests a fund that owns stocks and writes call options to convert option time premiums into additional income.

At age 80, your investment portfolio’s value is reduced to the point where it is clear it will not support your current moderate spending pat-tern Your option income fund went down a lot Disgusted with stock mar-ket crashes and current low interest rates on bonds, you consider buying

an annuity, but the income from it would not come close to meeting your needs Your good health is a bit of a mixed blessing, because either you or your spouse can expect to live for another 15 years

In the preceding example, every choice you made could have been greatly improved Yet every choice was one that many people make And many others don’t do even as well as in the example because they save very little in the first place In the following chapters, we explain how to do bet-ter But let’s go on, because it is not just individuals who need to improve, but organizations and government as well

ORGANIZATIONAL INFLUENCES

Let’s leave government aside for the moment Looking at our schools, our employers, and different types of financial service businesses, we can see some problematic influences on the individual investor that might have oc-curred in the preceding example

From a young age, you are subject to the influence of consumer tising, implicitly opposed to taking advantage of the enormous power of compound interest over long periods We cannot blame advertisers for wanting you to buy their products But this advertising does not come with

adver-a ladver-abel: “Wadver-arning: this product madver-ay be injurious to your finadver-anciadver-al headver-alth.” Each of us must strike a balance between current and future satisfactions, and unfortunately, although high school included material on health, there

is too little in the way of financial health

You were later employed by a firm offering a defined benefit pension plan After investment returns were generally positive for some years, pen-sion fund actuaries extrapolated them far into the future The employers responsible for assuring the benefits of such plans were generally happy to agree, because long-term optimism reduced their short-term obligations to contribute to the pension fund And so, too little was saved to pay future pension benefits If the firm gets in trouble, even if your benefits were vested, negotiations may be reopened

The willingness of bankers, and particularly less regulated mortgage bankers, to help new homeowners assume very high financial leverage was revealed as a tragedy in the 2008 financial crisis But why would sensible

bankers do such a thing? The premise was that mortgages were not in high risk of default, even with very slight down payments, because housing prices had been going up fairly steadily for many years Besides, the lenders were selling off much of the credit risk We can’t blame them for wanting to make

a profit, but many of the same organizations lost heavily in the crisis from their remaining exposure, so it is not clear that the game was worthwhile except in the very short run

Financial planning based on asking investors how much they want to

spend on retirement, and goal setting in general, is fine if the decision able to be adjusted is how much to save But to the extent it only influences investment allocations to take on more risky investments so as to stretch returns to meet the goal, it is not helpful because it does not increase the ability to take risks However, it does generally increase fees We don’t sug-gest that financial advisers are bad people Many are very sincere in their desire to help But as Karl Marx noted over 150 years ago, ideology often unconsciously reflects material interests

vari-Rules, such as spending 4% of initial retirement income, may work sonably well on average; however, there is nothing magic about that number, and in some cases it should be lower Such rules do not incorporate enough flexibility in consumption spending In effect, they transfer current consump-tion risk to future risks that could precipitate a downward wealth spiral We have to recognize, however, that it may be very uncomfortable for an adviser

rea-to tell a client that he or she must cut personal consumption, especially after one has been working with the client for years and will be blamed

Pension funds deciding on investment managers to retain to manage

a portion of its funds and financial advisers recommending mutual funds both tend to recommend those funds whose managers have done particu-larly well over the previous five years Yet the evidence these managers and funds do better than average over the succeeding five years is scanty and sometimes perverse Why do these professionals make this same mistake individual investors make? Of course, we know that agents have agendas different from those of the people who hire them But many, probably most,

of these professional agents sincerely believe they are adding value

Broker questionnaires satisfy legal obligations to “know your customer” and make sure that investments are in some sense suitable But do they really forecast how investors will behave if they lose a substantial amount of money? Even putting emotions aside, they measure a subjective belief today rather than the more relevant objective financial need tomorrow

There are rules on how investment return performance must be reported, but they do not require after-tax, risk-adjusted measurements If this were done, and compared with the same measurements on a benchmark passive index fund, it would be much more difficult to tell even naive investors a

plausible story of unusually good return prospects With very few tions, fund managers make no attempt to educate their investors on how to assess their performance In general, portfolio managers strive for the best returns they can achieve on the measurements they have been given But, again, ideology unconsciously reflects material interests What does a well-established and profitable business organization do if they have no business model for profitably serving the educated investor?

excep-By the way, we are not suggesting that professional investors have no skill in improving returns beyond those of passively managed index funds

We are saying that on average it is difficult for their clients to capture that benefit after fees and expenses

Investors seeking higher retirement income are often tempted by kers and other financial advisers pointing out opportunities to invest in complicated products such as option-income funds, master limited part-nerships, and other investment approaches that averaged over enough time essentially provide extra distributions while reducing their capital Even professionals who manage such funds may not be fully aware that this is what they are doing

bro-Successful boutique investment management organizations often earn their reputations with a well-defined investment approach They attract investors who then feel they have bought that approach, not just the firm executing it When the investing environment changes, if the manager adapts by altering the approach, investment consultants and their own cli-entele will often complain bitterly of lack of focus and discipline So most managers stick to their advertised approach, even when they suspect it is not the best they could do This is so ingrained that it constrains their research into new methods as well A good example occurs when so-called quantita-tive managers are flummoxed by discontinuities in statistical relationships governing return correlations and predictors They could address this by blending qualitative and quantitative methods, but refrain from doing so out of concern for losing existing customers and consultant referrals

We could go on, but you get the idea Organizational influences on the investor suffer from benign neglect in schools, shared ignorance by employ-ers, short-term profit desires in many financial service arrangements, and from the simple need to retain customers who believe smart people should

be able to make them more money than an index fund We did not always see it this way What has changed?

Empirical research and new technology have transformed the formerly acceptable to unacceptable Previously, no one knew how powerful highly diversified passively managed index funds could be Some professional inves-tors had found very profitable investment approaches because there was less information available and the markets were consequently less competitive

Now the market is more efficient (except when everyone is thinking alike) Also, as in other fields of endeavor, what was once good quality has become perceptible as poor quality At the same time, advances in knowledge and technology have also created a world of greater complexity The general pub-lic and the organizations that serve it have only started to catch up So have those who represent us in government, to which we now turn.

Government

In a democracy, government cannot get too far ahead of the ideas of the electorate And we know that new ideas are often actively resisted, and that this is a natural consequence of their tendency to divide us into winners and losers In the United States, this seems to be true for both Republicans and Democrats As technocrats, we believe government nevertheless can and should be wiser It is painful to watch our government trying to adapt to the modern financial world We illustrate this with several examples

Saving

Demographers have known for many years that birth rates are declining, that people are living longer, and that new medical technology is making it possible to extend life—but at high costs We have known for many years that the ratio of actively working people to people past working age is shrinking and will shrink further Yet the United States does little to increase savings and, at the same time, it further increases our collective financial obligations to the elderly

It gets worse Decades ago, there was a decline in the popularity of ism and a consequent widespread adoption of mixed economies with free market components throughout much of the economically underdeveloped world It became obvious that globalization of high labor productivity would take place, and that workers in the most developed economies in Europe and North America would now have to compete with vast numbers of workers

social-in formerly less-developed economies Economics 101 said that if the supply

of skilled labor applicable to tradable goods and services doubled or tripled, this would have an effect on incomes of labor in the developed world.Those in government had every reason to suspect that this enormous increase in skilled labor supply would worsen the ability of most people in developed economy countries, including the United States, to increase or maintain their living standards Yet the U.S government has encouraged us

to spend on consumption so as to keep up employment in the short term rather than to save and invest funds in infrastructure, capital equipment, research, and education to provide for longer-term success

EXHIBIT 1.1 The Decline in the U.S Personal Savings Rate

Source: St Louis Federal Reserve Bank.

It gets even worse Though the impact of globalization will eventually become more bearable as living standards around the world come closer to those of the advanced economies, we suspect that further stresses lie ahead Computerized automation of job content seems to be moving faster than the ability of people to educate themselves for higher skilled jobs

Exhibit 1.1 shows the decline in the U.S personal savings rate during recent decades There is a brief partial recovery after the 2007–2008 finan-cial crisis, but it seems to be settling back to very low levels If government shows no inclination to prepare for the future, is it surprising that neither would individuals?

What has all this to do with financial advice? Everything The decision

to save is the most fundamental of financial decisions, whether it is in terms

of securities, cash, or real resources If our government won’t save, most of

us won’t save enough either

Persistent Low Quality

One of us once heard a broker compare himself to a heart surgeon He said,

“the only difference is that I operate on their wallet.” The analogy with the

medical profession is apt Up through the eighteenth century, medicine was associated with bleeding the patient, and a wide range of treatments of no value but big promises were common until the twentieth century Eventu-ally, with collection of reliable data, government required the medical pro-fession to reform itself, even though legislators were not medical experts Today, doctors must meet educational and professional requirements, and new drugs are required to show efficacy and safety.

Our government is a little behind this standard in the financial service industries We disclose in fine print that “past performance is no guaran-tee of future returns.” We do not require labels that show just how little past performance is worth in indicating future performance, nor what side effects should be guarded against We do not require those calling them-selves “financial advisers” to accept fiduciary responsibilities Not every financial product or service requires a fiduciary standard, but we are miss-ing even a “first, do no harm” financial Hippocratic Oath

There are many examples of government financial naiveté that prevent improvements in financial product quality They often can be summarized

as overreliance on industry in setting regulations A current example is an argument over whether money market funds should be required to mark to market their investments True, such funds would be less popular if it were clearer that their principal were not guaranteed But to allow the public to think that they can’t lose money is not proper for government unless it is true

A more subtle example is found in the U.S government’s attempts to stimulate home purchases, with the form of “help” being influenced by giant lenders like Fannie Mae and by investment bankers anxious to sell securitized mortgages Before the 2007–2008 subprime mortgage crisis, banks were motivated to become pass-through mortgage lenders, leaving much mortgage origination and mortgage holding to others As a result, the demand for credit skills was lowered and the quality of feedback to marginal borrowers reduced After the crisis, both non-bank mortgage origination and the demand for private repackaging of mortgage pools shrank dramatically Subsequently, however, because of the U.S govern-ment’s efforts to help homeowners recover, further forced declines in inter-est rates, as well as competition from the Federal Housing Adminstration (FHA), Fannie Mae and Freddie Mac, have essentially forced banks to lend to only the most creditworthy homebuyers Without bank risk-based pricing for less creditworthy borrowers, the indirect result is to continue diminished demands for a full range of credit skills within the bank

As a result, the quality of the product (home mortgage loans) has been reduced, because borrowers can less rely on bank feedback to tell them how much house, if any, they can afford to buy This is an example of government not only being perhaps unduly influenced by industry, but of

government not foreseeing the indirect effects of what naively seemed to be

a straightforward subsidy of home ownership

Booms and Busts

Does the government stabilize the economy? Or do its actions promote stability? Consider the home mortgage boom and bust that collapsed in 2007–2008 It can arguably be laid at the feet of an accommodating Federal Reserve’s low interest rates, loose banking regulation, and Congressional encouragement of excessive mortgage lending Though the housing bubble was not hard to observe at the time, the government seemed to be surprised when it burst

in-In the succeeding five years, the Federal Reserve has maintained low interest rates, striving mightily not only to enable banks to repair their balance sheets, but to help with the unemployment picture Some have expressed surprise that low rates have not done more to spur lending, for-getting, perhaps, that lending is a function not only of fund availability, but also of borrowing requests and perceived creditworthiness So the Fed per-sists with quantitative easing programs, one, two, three and more When the government persistently injects more subsidies into security market prices,

super-as the Fed hsuper-as done by a long-term project of buying bonds to push interest rates down, the change in prices triggers trend-following by many investors Such momentum investing is the source of much of the instability in market prices, amplifying as it does any trend, and easily pushing prices past their equilibrium points At the time of this writing, we may now be in a bond bubble, in danger of seriously disappointing recent purchasers if interest rates begin to climb

THE REST OF THE STORY

We hope these examples illustrate the breadth of the problems raised by poor financial decision making They are so widespread that they affect all

of us Many readers will think we are exaggerating In Chapter 2, we refer

to compelling research evidence to support our thesis of widespread cial dysfunction The opportunities for improvement are mindboggling.What tools do we offer for addressing them? We provide the reader with empirical research findings, with critiques of received wisdom, with explanations of investing practice, with what we think are improved con-ceptual models and frameworks, some original, some well-known but insuf-ficiently employed, and with a sprinkling of comments reflecting our own experiences as professional investor and teacher Why such a potpourri? It

finan-is probably a mfinan-istake to approach financial decfinan-isions with only one model

of reality The financial system and personal financial decisions are ently complex No single model or method, if it is to be understandable and widely useful, will capture every relevant fact or insight

inher-Consequently, the next part of the book provides building blocks for developing your framework for financial thinking in what we believe

is a very productive direction Chapter 3 begins with simple models for financial planning using balance sheets extended to include planned future cash flows Chapter 4 turns to a discussion of “mostly” efficient markets, which upend common sense Chapter 5 introduces the discretionary wealth approach to financial decisions, which helps one set risk tolerances for bet-ter long-term performance using objective criteria In Chapter 6, we intro-duce Bayesian probability thinking, and apply it to the problem of making investment choices Finally, in Chapter 7, we come back to the need for self understanding, which is one way of describing what is academically known

as “behavioral finance.”

The following part of the book makes the application of the ing blocks more concrete with implementation detail Chapter 8 discusses how to be more tax efficient in investing Although tax rates are subject to political renegotiation, the basic principles will endure Chapter 9 treats the opportunities for better matching investors to investment products and strategies We believe that one of the great chances for an improved finan-cial service industry lies in adding value through customization Chapter

build-10 distinguishes active from passive investing, and discusses when each is appropriate In Chapter 11, we present some radical but, we believe, very practical ideas for better performance measurement To round out imple-mentation insights, we discuss in Chapter 12 some of the main challenges met in delegating investing responsibilities to professionals

The last chapter of the book, Chapter 13, stands on its own as a sion of the relationship between financial advice and the society we live in Our view is that the current situation is no longer acceptable, and we argue for change using simple feedback models as a device for focusing on key areas where improvement will help push previous reform efforts to have greater effect Our thesis is that better financial decision making can have

discus-a profound impdiscus-act on our modern findiscus-ancidiscus-ally oriented society We believe

it can promote economic efficiency, support more growth and innovation, advance the right kinds of talent, aid social cohesion, make government wiser, and generally help in the pursuit of happiness

The only way to find out if we are serious is to read the rest of the story

2

The Evidence Is Compelling

You need not take our word for it This chapter supports our view with the research findings of others We also take some potshots at famous theories that seem not to have gotten very far in helping most people save and invest

FINANCIAL PLANNING

Aesop’s fable of the grasshopper and the ants reminds us that financial ning in some form has been around for more than two thousand years More recent academic advice is strongly influenced by the work of Franco Modigli-ani in the 1950s The “life-cycle hypothesis” for which, in part, he received the 1985 Nobel Prize in Economic Science, essentially states that individuals act to smooth the utility of their consumption over time The life-cycle model does not in itself suggest specific assisting mechanisms in an imperfect world

plan-To the extent that the model is operational, it reflects the common sense that

we should save enough to support ourselves in our old age

In contrast, substantial proportions of the United States population

test situation with an objective determination of time preference, Ameriks et

al (2004) found that even among a group of highly educated and relatively affluent subjects there were subpopulations with exaggerated preference for current rewards over future rewards, and that these subjects possessed less monetary wealth on average

Thaler and Shefrin (1981) gave us a better understanding of ers by postulating spending and saving decisions as the outcome of the inter-action of two sets of utilities operating within the individual: the “doer” who cares only about the next time period and the “planner” who cares about the longer term Research by McClure et al (2004) supports that

under-sav-1 See Haveman et al (2002).

view; impulses to satisfy current desires and to provide for future tion appear to arise in different parts of the brain The Thaler-Shefrin model suggests improved prescriptions for higher saving for undersavers, such as precommitment to save at a higher rate contingent on future bonuses and increases in incomes Though promising, these prescriptions have been slow

satisfac-to gain practical implementation

The life-cycle model deals with time smoothing expected financial resources rather than with growing opportunities in an uncertain world What happens if you unexpectedly gain enough wealth to meet your previ-ously planned future needs? Should you stop saving? Or should you provide more opportunity for your wealth to grow further so that you may raise your aspirations? Difficulty in dealing with such questions suggests the need for further thinking about the nature of good financial planning

In the United States, as in many other developed economies, the failure

of most people to personally save enough to provide for their old age is materially offset by government-mediated transfer payments It is easy to see the benefits of social insurance as risk pooling It is also easy to appreciate the need to provide some compensation for the increased income inequal-ity that appears to have accompanied globalization and ever more complex technology However, the unintended consequence of the U.S transfer pay-ment approach is the shifting of the problem of undersaving from the indi-vidual to government, with problematic results for society as a whole The political process is made less functional through greater polarization; those with more financial resources understandably resist efforts to transfer them

to those with less At the same time, a lower savings rate means that needed investments in education, research, capital equipment, and environmental protection may be foregone

YOUR MOST IMPORTANT INVESTMENT DECISION

How much should you invest in relatively safe cash and bonds and how much in riskier common stocks? How much to other types of investments such as real estate? The exposure to risky investments determines not only how much your savings will be worth on average in a few decades but also how big is the probability of doing very badly, especially if you need the funds to be available in the interim

All too common is the advice to invest for the average return necessary to meet your future spending goals This advice generally does not pay enough attention to the possibility of disappointing investment performance or to the possibility of adverse changes in your financial situation Beyond that, it plays into the hands of those who exploit the common misperception that

a riskier investment necessarily carries an expectation of higher returns, as early noted by Dusak (1973) in her study of investing in commodity futures.Investor questionnaires to determine suitability of investments for the particular investor may be less helpful than they appear For example, Gra-ble and Lytton (1999) developed questionnaire items that appear somewhat reliable as predictive descriptions of risk-taking behavior So we know, for example, that the typical male is more risk prone than the typical female But this fact does not seem to be strongly connected to future financial needs, but instead connected with comfort and personality That is, it may be good description, but it is not good normative advice A more elaborate method asks the investor to respond to a simulation of long-term results under dif-ferent allocations of wealth between stocks and bonds Again, however, the investor is likely to have a poor idea of how he or she will feel in the future

as the consequences are played out

The most frequently taught approach to quantitative investing, based

on the mean-variance optimization method formulated by Harry Markowitz (1959), tells you quite a lot about good diversification given investment characteristics However, it tells you nothing about how much to invest in stocks versus cash and bonds unless you happen to know your best risk tol-erance to achieve your objectives That is, it begins by assuming you know what you probably don’t know

In a revealing experiment with university employees asked to allocate retirement funds, Benartzi and Thaler (2007) found that the stock–bond split was very strongly influenced by whether the participants were pre-sented with more bond fund alternatives or more stock fund alternatives Description of behavior, again, can be a very poor guide to good advice.Are you persuaded yet of the need for better guidance for risk taking? It gets worse as we move from individuals to institutions, where risk taking is further stimulated by asymmetric rewards That is, the mortgage broker, the hedge fund manager, the trader, and the corporate executive all take larger risks with someone else’s money because if they win they get rewards much bigger than their loss if they lose Existing measures supposed to prevent excessive risk, such as the Value-at-Risk (VaR) model enshrined in interna-tional banking convention, may instead have promoted it by displacing bet-ter measures It could even be argued that VaR is used more as an excuse for risk taking than as a limitation on it Some financial executives apparently

think it to be a measure of the most you could lose rather than as a measure

of the least you could lose with a given probability.

In the absence of strong conceptual frameworks, widely shared, that could be more effectively employed as a check on financial risk taking, the ultimate check against too much risk is the bursting of financial bubbles The global financial crisis beginning in 2007 and still continuing in 2012

appears rooted in excessive risk taking The result is not a lack of saving, but rather negative saving in the form of too much borrowing Reinhart and Rogoff (2009) give us a compelling account of how this most recent exam-ple fits into the context of centuries of similar bubbles and their collapses.

If the primary safeguard against excessive risk taking were to continue

to be the memory of past traumatic crises, then as memories fade, we would

be doomed to repeat the bubble cycles described by Hyman Minsky (1986) again, and yet again

Diversification, the Only Free Lunch in Investing

Although the popularity of mutual funds and exchange-traded funds (ETF’s) has improved the situation, investors as a whole appear to be substantially under-diversified Studies by Goetzmann and Kumar (2001, 2007) have found that the average investor in individual common stocks holds only about four different stocks, and that efforts to diversify are typically based more on the number of stocks than on any attempt to look for stocks that have less correlated returns with other stocks Their research indicated that under-diversification is positively related to the following attributes: youth, lower income, less education, overconfidence, trend following, local bias, and risk tolerance as indicated for preferences for volatility and skewness

A study by Dorn and Haberman (2005) of German discount broker tomers found similar factors associated with under-diversification, including self-reported risk tolerance, less experience, less knowledge about financial securities, youth, and being male

cus-There is some evidence that in the case of bias toward geographically local stocks, and also for a subset of more wealthy, experienced and knowl-edgeable investors, lack of diversification is associated with higher returns,

bulk of investors, under-diversification is associated with lower returns.Perhaps the most surprising under-diversification occurs in context of failing to diversify one’s employment or business-related risks, typically rel-atively large, with one’s investment holdings Not only are investments not well-diversified against employment compensation, but they often include a large component of company stock Benartzi (2001) and Liang and Weis-benner (2002) report allocation of the employee discretionary contribu-tions to their pension fund accounts to employer stock on the order of 25% and 19%, respectively These allocations can range much higher, as in the famous case of the Enron failure

Statman (2004) argues that underdiversification in stocks should not be surprising because, contrary to the mean-variance optimization model, inves-

2 See, for example, Ivkovic et al (2006).

tors do not consider their wealth as a whole, but invest different portions to achieve different goals They may not exhibit risk aversion when they invest

a portion of their wealth in stocks for aspirational reasons But again, this is what investors do, not what they should do to better their financial outcomes

The Ultra-Competitive Market versus Belief in the Expert

During the 1960s, it first became academically popular to describe liquid investment securities markets as “efficient markets.” That is, new informa-tion seems to be incorporated so rapidly into prices that an investor can-not expect to beat the market indexes after accounting for trading costs, at least in a risk-adjusted sense, by skill rather than chance The supporting evidence is very widespread, though it does not seem to account for bubbles when market participants all seem to be moving in the same direction In later decades, research documented the existence of a number of “pricing anomalies” and “skill anomalies” that seem to be modestly at odds with this description Nevertheless, the evidence of just how competitive are the se-curities markets should be daunting to those who try to “beat the market.”For example, a well-conducted study by Barber and Odean (2000) of 66,000 households who were customers of a discount broker during 1991 through 1996 found an average annualized return (net of trading costs) of minus 1% relative to that of an unmanaged capitalization-weighted market index Worse, these households had holdings tilted toward smaller stocks and “value-oriented” stocks, and those tilts as a whole happened to out-perform during the period When small and value factors were added to the benchmark, the average underperformance in specific security trading was about 3% per year! Trading costs, including both commissions and bid-ask spreads, were responsible for most of the 3% deficit

Such studies deal with averages, and the spread of the returns of vidual households around these averages can be large Separating skill from luck in these deviations is not easy, and it is also likely that the offending transaction costs are lower today However, the odds start out against stock trading by individual investors

indi-What about professionally managed investing? As a group, professional investors do better than individual investors, but not as well as one might hope from people whom we look to as expert

Pension plans, endowments, and foundations, over 4,000 of which were studied by Goyal and Wahal (2008) over the decade 1994–2003, show

a strong pattern of hiring professional managers who have had good past performance However, this success-chasing effort appears to have had aver-age excess return results indistinguishable from zero going forward, at least

in domestic U.S stock and bond mandates, though there appear to have

been positive results for international stock mandates in that period Worse,

in a smaller sample of 412 round trips where a manager fired could be tified with a replacement manager hired, presumably taking away the effect

iden-of reallocation across broader asset categories, the round trip appeared to have negative average value of around 2% That is, those hired systemati-cally did worse than those fired

Overall market-timing between stocks and either bonds or cash, seems

to be problematic for most investors, including professionals, but we ent no evidence here on that topic There is evidence of long-term reversion

pres-to the mean in valuations that can potentially reward the very patient

inves-tor, as discussed by Campbell and Shiller (2001) Essentially, this reduces to the case of those who can be long-term contrarians relative to speculative bubbles But the number of bubbles experienced by each investor is not large enough for easy statistical research

There are many more independent observations relative to individual stock selection than there are for market timing Here, there is strong nega-tive evidence even for professionally managed funds

At the level of security selection by fund managers, Malkiel (2005) gives us an idea of the terrain when he noted that over the 10 years end-ing in 2003, 86% of large capitalization (presumably U.S.) equity mutual funds recorded by the Lipper service were outperformed by the Vanguard fund tracking the Standard & Poor’s 500 capitalization-weighted index Kosowski et al (2006) found that the average U.S open-ended domestic equity fund underperformed in 1975–2002 Though there was some evi-dence of positive individual stock-picking skill for growth stocks in the top decile of performers, this value added diminished after 1990 Duan et al (2009) found some evidence of ability to add value through stock picking in stocks with more variability not correlated with that of the stock market as

a whole, but this finding appears to be before subtracting transaction costs and in any case disappeared after 1995

Such research does not prove that there are no experts in stock picking who could justify trading for better returns, but rather that they are at best

a quite small minority of those advertised as expert It has gotten very hard

to find them as the number of competing mutual funds and hedge funds has multiplied Good financial advice should allow for good results even if you are unable to identify skill in stock picking

OPTION PAYOFFS ARE NOT SIMPLE

Financial instruments whose return results do not vary at least mately linearly with some observable cause are hard for most people to

approxi-understand, particularly if the cause itself is the outcome of a probability distribution with considerable dispersion The most prominent of such in-struments are tradable options—puts and calls Rather than call them “de-rivatives,” we really should say “nonlinears.”

Some securities whose values are derivatives of other securities, such

as future contracts, are relatively linear in their payoffs and, therefore, are simple, even if dangerous because they can be traded on low margin Options are agreements giving the right, but not the obligation, to buy (a call option) or sell (a put option) some underlying security at a particular price, subject to conditions such as a time to expiration An option, unlike a future, is complex because its value is not a straight line (linear) function of the underlying security’s value, and even that function may change as condi-tions change, as with a shrinking time until expiration

There are dozens of articles in leading academic finance journals with the word “option” in their titles See Britten-Jones and Neuberger (2000) for a glimpse of investment difficulties even with relatively simple options The situation has been made worse by the invention of option contracts with more and more complexities, such as multiple options, options on options, lookback options, and the grafting of option features to otherwise innocuous agreements, such as the option adjustable rate home mortgage The result is that even many professional investors are unable to properly manage the risk and return trade-offs involved in investing in securities with embedded option features

Consider the list of financial disasters involving institutions that should have known better Orange County, California (1994), fell afoul of “inverse floaters” and declared a rare governmental bankruptcy Nick Leeson bank-rupted Barings Bank (1995) trying to hedge long positions by selling call and put options Long-Term Capital Management (1998)—despite the involvement of corecipients of the 1997 Nobel Prize in Economics, Robert Merton and Myron Scholes—required a $3 billion dollar bailout to protect the financial system Enron (2001) using derivative products, along with off-balance sheet partnerships, produced temporarily inflated profits and encouraged extreme leverage, leading to a huge bankruptcy

Option properties are often attached to securities that would otherwise

be easy to understand Consider, for example, a bond convertible to a stock

at a particular price, or a bond that can be called by the issuer well short

of its maturity, or a bond with both of these properties How do you value them? Not easily, at least by most mortals

Consider tranches of certain structured products that pay interest as long as there is sufficient collateral from a pool of mortgage loans These also have nonlinear payoffs depending on the health of the underlying mort-gage pool In 2008, high leverage by subprime mortgage borrowers, made

possible by mortgage pool securitization in “structured products,” set off

a tsunami of financial problems The initial repayment difficulties of prime borrowers when housing prices stopped rising triggered defaults for the most aggressive mortgage lenders But the ripples from these problems were massively amplified by the consequent need to deleverage positions at many financial intermediaries, leading to the disappearance of Bear Stearns and Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, and a global financial panic, with extraordinary bailout costs by the U.S government and ultimately U.S taxpayers

sub-If professional investors make such mistakes, we can be sure there are many unreported similar mistakes involving ordinary investors

AFTER-TAX PAYOFFS ARE NOT SIMPLE

Taxes create much the same kinds of nonlinear complexity as do options The mistakes made by investors seeking to reduce their tax burdens may not

be such disasters for society as a whole But they stem from the same root cause—too much complexity for the ordinary investor Even professional in-vestment advisers are hard put to devote enough resources to exploit the tax intricacies of individual cases, especially for investors whose limited wealth may not justify the fee advisers would need to charge

What are some of the most common tax-related errors? Even for larger portfolios justifying professional management, after-tax performance reporting is often ignored Active management that succeeds in producing

higher pre-tax returns often produces lower after-tax returns through

cut-ting short the holding periods that would allow unrealized gains to build up

In the United States, active management frequently incurs punitive term capital gains taxes Hedge fund returns are advertised on a pre-tax basis even though typical high turnover and derivative-laden strategies pro-duced returns that are taxed more heavily than available long-term capital gains rates

short-Investors with access to modern portfolio theory and mean-variance optimization for constructing their portfolios are particularly ill-treated; with rare exceptions, asset allocations are done on a pre-tax basis

The disposition effect refers to the tendency of investors to sell winners

and let losers run, consequently minimizing their ability to build up untaxed

unrealized gains to help the compound growth rate of their investment

and Odean (2004) found that investors consequently do not systematically harvest their deeper losses to take advantage of tax-reducing opportunities

3 See Odean (1998).

More subtle is the issue of asset location—how much of a given asset

to allocate in an investor’s taxable account and how much to allocate to the investor’s tax-deferred accounts (i.e., IRA and 401(k) accounts) Inves-tors often fail to concentrate their more highly taxed bond returns (interest taxed at ordinary income rates) in their tax-deferred accounts While some

of this may be a precaution against early withdrawal penalties, it may also

Estate (inheritance) taxes present additional complexities, and even investors who have enough wealth to benefit from estate tax planning do not always seek competent help

We expand on these topics in Chapter 8 where we cover the taxation of investment income and various tax-efficient strategies

OUR PRIMITIVE BRAINS AND MONKEY SEE, MONKEY DO

The departures from ideal rationality we experience as investing individuals and in groups are the topic of many books and articles on behavioral finance and behavioral economics An excellent popular book on the difficulty of properly debiasing and properly calibrating probable errors in prediction

is furnished by Silver (2012) In Thinking Fast and Slow, Daniel

Kahne-man (2011) provides a superb introduction to individual decision making

as actually practiced More specific reviews of how it applies to investing are those by Shefrin (1999) and Shiller (2002)

The mental compartmentalization problem is acute Investors do not seem to take seriously the need to diversify their investments (one men-tal compartment) away from the areas of familiarity and loyalty inherent

in their roles as an employee or business owner (another mental ment) Shefrin and Statman (2000) found it necessary to base a descriptive model of investor decision making on separate compartments

compart-Another pervasive mistake is the tendency of an investor to at first resist

is particularly apparent in coping with losses During bear stock markets, many investors at first ignore or minimize the consequences of overall stock market losses, followed by indecision, and then as losses continue, engage in panic selling of all stocks, consequently rendering themselves unable to par-ticipate in recovery There is an inability to make a measured response It is though mental fight at some point gives over to mental flight, an emotional response on both counts

4 See Amromin (2002).

5 See Barberis et al (1998)

Although behavioral finance does a good job of pointing out individual psychology’s effect on investing, the analogous work for the impact of social psychology is not as prominent But it is an old topic in the practitioner’s investment literature Some passages in Silver (2012) are a reminder that although the wisdom of crowds can be very useful if independent views are aggregated, it can be perverse if crowd members imitate the views of oth-ers in the crowd Then it becomes the mass delusion of crowds as imitation goes to fashionable extremes The speculative bubble in Internet stocks that burst in 2001 bears the mark of fads in valuation (prices based on eyeballs,

in that case) A healthy market has a variety of views A healthy investment decision takes into account that variety But this is very far from what we observe in practice for typical investment decisions by nonprofessionals

OTHERS’ AGENDAS AND THE PERILS OF THE IVORY TOWER

Neither academic work nor practitioner journals seem to have confronted fully the basic problems engendered by the need for most investors to use investment advisers, brokers, bond rating agency raters, professional asso-ciations, news providers, pension fund committees, mutual fund and bank employees, and even university professors and researchers, and yet another group, government regulators and watchdogs, as intermediaries to their in-vestments Every intermediary needs to be paid, directly or indirectly Every intermediary has his or her own personal agenda and may also conform to the agenda of an employer organization There may or may not be unethi-cal conflicts of interest, but there will always be divergences in goals Allen (2001) gives a lucid explanation of how asymmetries in reward systems can promote speculative bubbles In his case, he referred to the Internet bubble, but the explanation applies equally well to the extremes of the recent finan-cial crisis

The large size of the financial services industry in employment, assets, and market valuation as compared to most other segments of the economy

is only the most obvious symptom of what are known as agency costs These hidden costs include loss of welfare for investors who are encouraged to make investment mistakes by acts of both commission and omission They may also include damage to Main Street businesses and new enterprises caused by periodic financial stresses as Wall Street booms and busts affect the “real” economy

Universities help educate investors and help to make better rules of the road for financial agents But one cannot ignore the desire for tenure and promotion that drive faculty Swidler and Goldreyer (1998) concluded that the acceptance of an article by one of the top journals of finance was worth