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Investing is Academic

In our last post, “What’s Pizza Got To Do With Investing? ” we shared insights from a recent Dimensional Fund Advisors article on the value of adopting a sound, academic-based investment strategy instead of succumbing to popular financial cravings. An October 14 press release from the Royal Swedish Academy of Sciences further underscored the timeless value of this advice, when University of Chicago Professor and Dimensional Fund Advisors board member Eugene F. Fama, was named a co-recipient of the 2013 Nobel Prize in Economic Sciences, in recognition for his contributions to the “empirical analysis of asset prices.”

 In our opinion, it’s about time that Professor Fama was tapped to receive among the highest academic honors available. Much of our understanding on how to identify and harness the relationships between market risks and expected returns is grounded in Dr. Fama’s contributions, along with those made by many of his academic colleagues, as depicted in this timeline .

Dr. Fama’s groundbreaking work in capital market theory dates back to 1966, and the formation of the Efficient Market Hypothesis. You’ll note his name also appears regularly as a financial innovator, along with fellow Dimensional Board Member Kenneth R. French, and many other notable academics who have helped guide our perspective on financial markets. With the 2013 addition of Dr. Fama to the list, we count nine Nobel laureates in the referenced timeline who have unquestionably enhanced our ability to help investors achieve their personal long-term goals by minding the evidence on what drives market activity.

Which brings us to Dr. Fama’s co-recipients, fellow University of Chicago Professor Lars Peter Hansen and Yale University Professor Robert J. Shiller. For many on the inside of financial economic drama, the shared award comes with some bemusement, in that Dr. Shiller is often found at logger heads with Dr. Fama regarding the role that market efficiency plays in investors’ decisions. In a Bloomberg column , 1987 Nobel laureate Robert Solow said that naming professors Fama and Shiller as co-recipients is “like giving a prize to the Yankees and the Red Sox.”

As in any academic field, financial economists forever wrangle over points that may seem agonizingly granular to most of us, but that can still have significant impact on our daily lives – for good or for ill. In this case, the debate is approximately over whether overall market efficiency should lead us to patiently participate in the market throughout its volatile swings, or whether potentially predictable irrational investor behavior (bubbles) may justify trying to respond to shorter-term fluctuations.

In light of the collective evidence available from professors Fama, Shiller and others whose work we routinely track, we remain convinced that your best financial interests are served – and your carefully planned goals most likely achieved – by avoiding the expenses involved in trying to profit from market irrationality. The practical hurdles continue to strike us as counterproductive in a long-term planning process.

As we celebrate Dr. Fama’s richly deserved reward for his contributions to our financial lives, we are delighted to be part of our clients’ lives as well, helping them sift through often-conflicting headlines related to financial economics, global news, and their own life transitions. We relish our role of helping them arrive at a disciplined strategy to carry them through toward their personal goals … come what may.