Tuesday, February 04, 2014

What am I, Chopped Liver? (Fama-Markowitz Department)

I wanted to introduce my finance students to the efficient capital market hypothesis (don’t waste your time trying to pick stocks) and portfolio  diversification (reduce risk without sacrificing return). Because of time constraints, I had to do it by lecture, not problem sets.   So I jumped up and down, I waved my arms, I chewed the scenery, blah blah.  Then I put up a grid of 15 stocks. I explained that we were to pick five to make a diversified portfolio.  I picked one, then I asked a student to pick one; I said he could choose either one he wanted (because it would add diversification) or one he did not want (because it would not add diversification). 

Result: every single student I asked said “I pick x” (or y, or z)—and why?  “Because it is a good company and the price will go up.”

I might as well have entertained them by playing the saxophone.


Ebenezer Scrooge said...

Wherein our kindly host demonstrates why banks support "financial literacy education" while they oppose consumer regulation.

Anonymous said...

MMMMMMM? Efficient Market Hypothesis?
If it is operative then how do we get "Malinvestment"? Sorry I was reading Noah about the Austrians.