Finance’s Wrong Turns
Richard Michaud, PhD, CEO
New Frontier Advisors, LLC
There is a foundational crisis in modern finance and professional investment practice. There is little credible evidence that active investment strategies provide superior risk-adjusted, cost-adjusted return over investment relevant horizons. Investors are increasingly adopting minimal cost no-information index or rule-based factor funds. Why is professional investment management often unreliably effective? Is active investment management cost-effective viable for meeting long-term investor goals? What risks for investors who adopt minimal cost no-information investment strategies?
This course argues that modern financial theory has been in error for more than sixty-five years and institutional asset management technology, derivative of defective theory, has been often ineffective in adding value. The misdirection of early theory is no simple blunder but the consequence of a fundamental misunderstanding of the nature of human rational decision making under uncertainty with roots in mathematical logic, psychology, and the theory of games. Insights from the early history of finance theory and more effective 21th century mathematical simulation and statistical innovations have been shamefully ignored. A misunderstanding of the elemental social dynamics nature of financial markets highlights the critical need and also the opportunity for developing more effective theory and tools for practice.
The course is centered on the invention of the Markowitz (1952) mean-variance (MV) efficient frontier and axioms for financial theory. The timeline of our narrative spans backward to the early pioneers of modern finance, the crisis in mathematics and rational thought, critical contributions of rational social behavioral theory, contemporary developments of 21st century mathematical and statistical technology, and implications of evolutionary social dynamic theory leading to a fundamental new understanding of the nature of financial markets and guidance for more effective asset management. Finance needed to back up in order to avoid historical mistakes and follow a more productive path for the future free of the errors of 20th century financial theory and practice. We provide multiple sources of evidence for demonstrating the critical limits of financial theory and asset management tools used in practice. The journey includes revisiting fundamental concepts of the nature of finance and capital markets with recommended resolutions. Unfortunately, in the process, more than two generations of financial theory and quantitative methodological development will need to be discarded if progress is to be made.
Syllabus & Schedule
8:45 AM-9:20 AM Registration and breakfast
9:20 AM-9:30 AM Welcome and opening remarks
9:30 AM-10:15 AM Session 1: The Birth of Modern Finance and Finance’s Wrong Turn
10:30 AM-11:30 AM Session 2: The Rise of Institutional Quantitative Asset Management
11:45 AM-1:00 PM Session 3: A Theory in Crisis
1:00 PM-2:15 PM Networking lunch
2:15 PM-3:15 PM Session 4: The Simulation Revolution
3:30 PM-4:15 PM Session 5: Evolutionary Financial Markets
4:30 PM-5:00 PM Wrap-Up and Q&A
5:00 PM-6:30 PM Reception
Dr. Richard Michaud is President and Chief Executive Officer of New Frontier. He earned a PhD in Mathematics and Statistics from Boston University and has taught investment management at Columbia University. His research and consulting has focused on asset allocation, investment strategies, global investment management, optimization, stock valuation, and trading costs. He is the author of Efficient Asset Management, Investment Styles, Market Anomalies, and Global Stock Selection (CFA Research Monograph 1999), and over 60 published journal articles, manuscripts, and white papers available at SSRN.com and Researchgate.com and on the New Frontier website. He is co-holder of four U.S. patents in portfolio optimization and asset management, a Graham and Dodd Scroll winner for his work on optimization, a former editorial board member of the Financial Analysts Journal, associate editor of the Journal of Investment Management, and former director of the “Q” Group. Dr. Michaud's research was recently profiled in WatersTechnologyM 2019: " Rebel Math ." Notable press articles also include Institutional Investor 2010: Modern Portfolio Theory’s Evolutionary Road, and Pensions & Investments 2003: “Markowitz says Michaud has built a better mousetrap.”
The presentation level requires familiarity with modern financial concepts at an undergraduate finance level, financial practitioner, or CFA level I. There are no mathematical derivations or theorems. The discussion will remain primarily at an intuitive level with exceptions banished to short digressions.
Boston College Club
100 Federal Street
Boston, MA 02210
Description:Members: $150 | Non-Members: $250
Attendees will receive a complimentary copy of Michaud and Michaud, 2008,
Efficient Asset Management 2nd ed. Oxford University Press.
Seating for this unique presentation will be limited. Venue has a beautiful view of the city of Boston. First come first served.
Contact Pauline Hickey with any questions and assistance with hotel reservations.
CE CreditCFA Boston has determined that this event qualifies for 5 CE credit hours under the guidelines of CFA Institute's Continuing Education Program. If you are a CFA Institute member, CE credit for your participation in this event will be automatically recorded in your CE tracking tool.