My asking around a bit confirms Eric; finance folks’ reaction is that everyone is sure there is a positive risk premium even though they admit the data isn’t very clear and everyone also knows relative wealth preferences exist and if strong enough could eliminate the risk premium. My quick search didn’t find anyone else taking Eric’s strong position, and he says he can’t find anything either.Read the whole thing.
My best guess is that Eric is basically right. In fact, I’d guess lower returns for the highest risk investments come from enough investors being risk-loving in relative wealth; they are willing to lose out on average for a chance to gain the very most. However, even if Eric is eventually proven very clearly right, I’m not optimistic that he will get much credit or gain from it.
Monday, August 03, 2009
Bias in Finance
Over at OvercomingBias, Robin Hanson blogs about my SSRN Paper:
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1 comment:
I like your suggestion that there is no proof that a positive risk premium exists...for anything...I guess I am not suprised that you have not been inundated with kudos, though...
all the "heroes" of finance sell simple positive life reaffirming stories that it is easy to make money...ibbotson and sinquefield said "the data speaks"...rob arnott says "the data speaks"...LSV say the "data speaks"...Morninsgstar says "the data speaks"...every institutional consultant in the world says "the data speaks"...every single person who is successful in raising money is able to point to the "message" in what might just be noisy data....
you, rightly i think, have not adopted "the data speaks" approach...
I think you have taken on the mantle of Ibsen's Dr. Stockmann from the play An Enemy of the People....
You have challenged a very powerful and financial orthodoxy and the best way that they can deal with you is to ignore you....
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