Financial Theory Quotes

Obviously, consideration of costs is key, including opportunity costs. Of course capital isn't free. It's easy to figure out your cost of borrowing, but theorists went bonkers on the cost of equity capital. They say that if you're generating a 100% return on capital, then you shouldn't invest in something that generates an 80% return on capital. It's crazy.

I put forward a pretty general theory that financial markets are intrinsically unstable. That we really have a false picture when we think about markets tending towards equilibrium.

Reversion to the mean is the iron rule of the financial markets.

What's so seductive about the efficient markets hypothesis is that it applies nine years out of ten. A lot of the time it works. But when it stops working, you blow up.

What happened after publication of our paper was that, for the next 40 years, people said, all right, we now know the answer to the capital structure question under ideal conditions.

I'm happy to say I am a Harrison-Kreps-Keynesian.

I have a name for people who went to the extreme efficient market theory-which is "bonkers". It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality.

I take the market-efficiency hypothesis to be the simple statement that security prices fully reflect all available information.

Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values

I don't entirely reject the idea of efficient markets. It needs updating.

The sad truth is that it is precisely those who disagree most with the hypothesis of efficient market pricing of stocks, those who pooh-pooh beta analysis and all that, who are least able to understand the analysis needed to test that hypothesis.

Beta and modern portfolio theory and the like - none of it makes any sense to me.

The efficient market theory is one of the better models in the sense that it can be taken as true for every purpose I can think of. For investment purposes, there are very few investors that shouldn't behave as if markets are totally efficient.

I'm from Berkeley, California, so I'm fully trained in socialism and all, but basically what they teach you there is markets are efficient and we can't beat them, so we might as well index.

If you go back to the late '50s, there really was nothing called "academic finance." Well, there was something being taught in business schools as finance, but it really had no strong research underpinnings.

Stock prices are likely to be among the prices that are relatively vulnerable to purely social movements because there is no accepted theory by which to understand the worth of stocks....investors have no model or at best a very incomplete model of behavior of prices, dividend, or earnings, of speculative assets.

I think the rise of quantitative econometrics and a highly mathematical approach to risk management was the obverse of a decline in interest in financial history.

I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them.

To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.

One of the most exciting intellectual moments of my career was my 1948 discovery of Knut Wicksell's unknown and untranslated dissertation, 'Finanztheoretische Untersuchungen,' buried in the dusty stacks of Chicago's old Harper Library.

I get heartfelt thanks from all kinds of people. Today I heard from a waitress in Georgia who has lost her job and is trying to figure out how her local bank can change the terms on her credit card, and I heard from a physicist at a major research university who wants to explain a better theory of financial stress tests.

The theory is that if you take interest rates negative, people are going to say, "That's a silly game! I'm not going to lend my money to governments who want me to pay them. I am going to go into the stock market where I can get positive returns!"