MIB: Applying Academic Theory in Real World Practice

How do you take an innovative academic theory and apply it in the world of investing?

That was the challenge confronting David Booth, the co-founder of Dimensional Fund Advisors. Booth was a student of University of Chicago economist and future Nobel Laureate Gene Fama, whose ideas about efficient markets and factor-based investing revolutionized finance.

Booth & Fama discuss their 50 year relationship in our Masters in Business conversation, streamed live from the University of Chicago, Booth School of Business.

Professor Fama discusses how computers eventually led to the efficient market hypothesis — the technology allowed researchers to evaluate how well active managers were actually performing. Prior to that, there was no quantitative evidence or data as to how well or poorly managers actually were performing. The new data crunching technology also allowed the test of Fama’s theories, and for the first time, evaluated investing results net of fees.

This also led to the identification of factors that drove returns, and ultimately the (various) Fama-French Factor Models.

Booth discusses how taking his first class with Fama changed his entire life. He eventually created Dimensional Funds out of a spare bedroom in a Brooklyn apartment. He asked Fama to be on his board of directors, followed by Myron Scholes and Merton Miller, two other University of Chicago economics professor and future Nobel laureates.

The full video of the interview is here; A transcript of our conversation is available here.

You can stream/download the full conversation, including the podcast extras on Apple iTunesOvercastSpotifyGoogleBloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.

Next week, we speak with former Secretary of Defense Ash Carter, who is a five-time recipient of the DOD Distinguished Public Service Medal, plus the CJCS Joint Distinguished Civilian Service Award, and the Defense Intelligence Medal for his contributions to intelligence. Carter is author of 11 books, most recently, Inside the Five-Sided Box: Lessons from a Lifetime of Leadership in the Pentagon.