Richard Thaler has won the Nobel Prize in economics which is very awesome. Thaler is a cool dude. Not only is he a master academic, but Thaler is a market practitioner as well. He’s among the small group of people in this world who do a lot of theorizing about how the economy works, but also backs it up by running a pretty big asset management firm.
Thaler has an insane 110,000 citations on Google Scholar which shows how broadly influential his work has been. He’s covered an incredible amount of territory in his career and is one of the few people who coherently traverses both finance and economics. This is not easy to do as they are truly different worlds. And this is where I find Thaler’s accomplishments most interesting. You see, Thaler runs a multi-billion dollar asset management firm where they actually take their research and put it to real-world use. The firm’s largest fund “Undiscovered Managers Behavioral Value Fund”, founded in 1998, has been driving Gene Fama insane since its date of inception due to its consistent market beating performance.¹
Thaler has written a mountain of valuable research, but if I had to pick one paper I would lean towards “Myopic Loss Aversion and the Equity Premium Puzzle“. In the paper they explain that the equity risk premium (the amount by which stocks beat bonds) can be explained by myopic loss aversion – an irrational focus on the short-term induced by fear of losing money. There’s just so many pieces of awesomeness in that paper that I can’t write enough about it, but I’m pretty biased as an asset manager since this particular paper has had an outsized influence on how I think about the world.
On the econ side Thaler has blown nice big holes into the idea of expected utility theory and rational expectations which are decent starting points for a theoretical understanding of the world, but are unrealistic representations of the actual world. I would recommend “Risk Aversion” if you want to dive into that some more.
Anyhow, I could keep going on and on, but it’s nice to see the behavioralists getting their due so congratulations to Richard Thaler.
¹ – I haven’t done a full look under the hood at this fund, but I just like the fact that it must drive Efficient Market Theorists crazy to see this fund beat the market so consistently.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.