Transcript: Fuller & Thaler’s Raife Giovinazzo



The transcript from this week’s MIB: Raife Giovinazzo of Fuller & Thaler is below.

You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found on iTunesStitcherOvercast, and Bloomberg.


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UNIDENTIFIED MALE: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast I have an extra special guest. I’m going to bet you haven’t heard of this money manager but you should.

His name is Dr. Raife Giovinazzo. He runs the very interesting behavioral small-cap equity strategy at Fuller & Thaler. For the past five years, the fund has compounded at 17 percent and it has beaten 99 percent of all its peers. So, they are doing something right there.

He has a fascinating background and you’ll hear about both his academic background at Princeton and the University of Chicago, working for two of the giants in the world of behavioral economics, Danny Kahneman and Richard Thaler. How’s that for a pair of advisors.

And he spent his entire career working in that space trying to figure out how to apply the knowledge and the wisdom that those gentlemen and others have created in the field of behavioral finance to the world of investing. I think you will find this to be an absolutely fascinating conversation. I know I enjoyed it a great deal.

So, with no further ado, my conversation with Raife Giovinazzo.

I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My special guest today is Dr. Raife Giovinazzo. He is responsible for managing the Fuller & Thaler behavioral small-cap equity strategy at the firm Fuller & Thaler. He has a fascinating background.

Previously, he was researcher and co-portfolio manager with BlackRock’s Scientific Active Equity group. He has a B.A. in Sociology from Princeton and an M.B.A. Ph.D. from the Booth School of Business at University of Chicago.

But his advisors were Danny Kahneman at Princeton and Richard Thaler at Chicago. So, I expect this to be a fascinating conversation. Dr. Raife Giovinazzo, welcome to Bloomberg.


RITHOLTZ: So, let’s start with your advisors. That’s pretty elite group of people you worked with in your career. Kahneman is your undergraduate advisor and Thaler is your M.B.A. and Ph.D. advisor, that’s some serious intellectual firepower.

GIOVINAZZO: They are smart folks. I was lucky. You know, I took a class by Kahneman on decision-making. I loved it, asked him to be my thesis advisor. The funny thing is at that point in time, I didn’t understand that he was a giant in his field. I knew he was very smart obviously.

In the course of doing my research, I realized I’m talking to the number one expert in this subject matter and then he actually connected me ultimately with Thaler. He said — I called them up about five years after I’ve been working as a strategy consultant and said, “I want to go back and want to combine study of business with the study of psychology” and he said. “Well, you need to go study under my best friend Dick Thaler at the University of Chicago.

RITHOLTZ: How crazy is that?

GIOVINAZZO: It worked that well.

RITHOLTZ: So, during the time these folks were advising you, you have an appreciation of how unbelievably fortunate you are.

GIOVINAZZO: I did, you know, and that’s a nice thing. You know, it’s a great thing. Let me talk up my Alma Mater, the University of Chicago. There’s so many Nobel Prize winners there.


GIOVINAZZO: You know, I mean, ironically, I don’t know if you knew this fact, on my dissertation committee were both Thaler and Fama which is the only time that’s ever happened and, you know, to my knowledge that those have been on the same committee.

RITHOLTZ: And they’re golfing buddies as well.

GIOVINAZZO: They’re golfing buddies, yes. They get along much, much better than people think they do.

RITHOLTZ: Well, philosophically, they’re completely the opposite sides of the universe and yet.

GIOVINAZZO: I would disagree actually in that they both strongly believe in paying attention to evidence. Let’s look at the data —


GIOVINAZZO: — and that’s actually a big unifying approach as opposed to we’ll just look — we’ll have a theory about what should work —


GIOVINAZZO: — and we don’t actually care if it actually happens in the real world.

RITHOLTZ: So, they start with a data but they end up in very different places.

GIOVINAZZO: They have different interpretations of the data. That’s certainly true.

RITHOLTZ: To say the least. So, the other question that comes to mind is how did you go from Sociology, which is definitely not a money economic/business-oriented coursework, to right in the mix of finance and asset management? What made you decide Sociology leads to M.B.A.?

GIOVINAZZO: So, it happens that at Princeton the most flexible major was Sociology. I actually only took five Sociology classes as a, quote, “Sociology major.” To be honest, I was never very well trained in the discipline of Sociology, but it allowed me to take all sorts of social science classes and I think at that time, I was really searching for this understanding that it’s more than just economics. There is something that matters about how people think, how people behave, what are norms.

And so, I think it was a very natural transition to where I ultimately ended up even at Princeton to really being focused on this decision-making which is an intersection of Psychology and Economics.

RITHOLTZ: So, you come out of Princeton, you spent five years doing some consulting work, you end up going to Chicago, what was that, four years M.B.A. Ph.D.?

GIOVINAZZO: I wish it was only four.

RITHOLTZ: So, the M.B.A. is two years and then it’s another three or four years on top of that?

GIOVINAZZO: You know, what’s ironic is I told my wife when I joined the Ph.D. program, I think I’ll be able to do it in three years.


GIOVINAZZO: It turns out nobody does it in three years and almost nobody does it in four years. And so, I was the norm, I did it in five years. It’s kind of funny that meets the standard planning biases that —

RITHOLTZ: I was about to bring that up.

GIOVINAZZO: That’s exactly the planning biases —

RITHOLTZ: Kahneman talks about that all the time.


RITHOLTZ: When they started working on an economics textbook, he said. “Well, you know, we’re smarter than most of those other guys.” This will only take us and he said, “We were off by a factor of 10X —

GIOVINAZZO: Yes. Exactly.

RITHOLTZ: which is pretty funny.

GIOVINAZZO: I did the same thing. You know, what he says is people use an internal model to forecast. They think about their own personal situation and they down way the external model of forecasting which would be what happened to everybody else.

So, I felt like, OK, I’ve been here two years, I’ve taken some Ph.D. classes, I know what I’m doing, I have a focused area —

RITHOLTZ: How far could it be?

GIOVINAZZO: — I should be able to do it quickly. Yes.



RITHOLTZ: Listen, how hard is a trade war? It’s not that difficult. That is the classic planning fallacy right there.


RITHOLTZ: So, you get your Ph.D. and your M.B.A. and what’s your first job out of B-schools/Ph.D. school?

GIOVINAZZO: Yes. So, the Ph.D. program is trying to train researchers fundamentally and at that time, I actually thought I wanted to, if possible, go into an academic position. But I was fascinated by predicting stock returns.

I did always wonder a little bit if you really want to predict stock returns, should you be studying it? Why not actually try to put it in practice? But primarily, I interviewed four academic positions but as well as a few positions in the industry as well.

I was fortunate I did get a number of job offers. My wife is a Harvard business school graduate. She’s a successful executive and was very hard to match (ph) the location. I had an offer at Dartmouth actually with Ken French which was great.

But there’s no — there’s — that is a tiny town. There’s no real positions for —




GIOVINAZZO: No positions for my wife. And I also realized, you know, again, I like to be closer to actually implementing this. So, I actually have a conversation with Dick. I had a few offers in the industry. One of them was at Barclays Global Investors and the Scientific Active Equity group.

RITHOLTZ: And that eventually became BlackRock.

GIOVINAZZO: Which eventually became BlackRock. And I also had an offer fortunately from Fuller & Thaler and Dick said, “Look, if what you want to do is learn all about the investment process and be involved in everything with that, join our firm. We’re a small firm. You will do everything. If what you want to do is just focus on research, well, if you join our 20 Ph.D. staff research group at Barclays Global Investors, you can focus on research.”

And since at that time, I had been struggling with academia or industry. That seemed like a happy medium. But by the end of my time there, I had already moved over into more of a portfolio management role realized that’s what I wanted to do. So, it’s a great opportunity to come to Fuller & Thaler five years later.

RITHOLTZ: That’s fascinating. Let’s talk a little bit about behavioral finance. So, you leave Princeton under Danny Kahneman’s tutelage and ends up with Richard Thaler widely known at the University of Chicago, widely known as the father of behavioral finance. What was it like learning at the knee of the master?

GIOVINAZZO: It’s great. You know, one thing that impresses me about both of them is their willingness to actually be challenged and changed their minds. I think they both like me because I was willing to disagree with them and that’s good because if they didn’t like that then things have been a little bit rocky.

RITHOLTZ: I saw you do an interview of Dr. Kahneman not too long ago and you talked to him about the role of money buying happiness —


RITHOLTZ: — or how much you can. And his perspective on that has swung around. Tell us a little bit about that conversation because I thought your back-and-forth was charming.

GIOVINAZZO: Well, in college, he — at that point in time back in the late ’90s, he was doing a lot of research about experienced happiness as opposed to predicted happiness and part of that study was an analysis of how happy does money really make us. We all think it makes us tremendously happy, doesn’t make us as happy as we think.

And one of his conclusions at that time was that there is a kink in the amount of happiness we experience from money —

RITHOLTZ: Meaning define that kink.

GIOVINAZZO: So, meaning that the amount of happiness goes up, up, up with money up until at the time he said about $20,000 of income and then —

RITHOLTZ: Which 30 years ago meant economic security, you’re paying for healthcare and —

GIOVINAZZO: You know, even then, you know, 20,000 — you know —

RITHOLTZ: Not a lot of money.

GIOVINAZZO: — in the mid-’90s, 20,000 is not a whole lot and he said up till 20,000, you’d — your happiness increases with money. But after that, it’s flat. And I was joking with him, I actually talked to him about five years after college, working in New York, making fortunately more than $20,000 but not a whole lot more and I recalled when I got my first raise, it made me a lot happier. That is quite useful.

I said, “I got to tell you this does not match my experience of the idea that money beyond $20,000 doesn’t do anything more for my happiness.” And he at the time said, “All right. We got it wrong. Actually, it’s not kinked, it’s log linear, meaning it gets more and more gradual how much happiness you get from money —

RITHOLTZ: It starts to plateau, the rule of diminishing returns kicks in. It’s —

GIOVINAZZO: Yes. But to be precise, a plateau is literally a flat point —


GIOVINAZZO: — whereas diminishing returns is the slope is going down.


GIOVINAZZO: So, his point was just —

RITHOLTZ: It still goes up but much more slowly.

GIOVINAZZO: It goes up but much more slowly. Exactly. And so, I was just struck by this is a giant in his field, what giant in their field have you ever heard say, “I made a mistake. I changed my mind.”

Although then in that interview which you witnessed, he said, “Raife, I’ve now gone back to thinking that it is in fact kinked and there’s a permanent plateau where it doesn’t get higher.”

RITHOLTZ: I wonder if that’s just the function of longevity and seeing the world from your 70s and 80s as opposed to your 30s and 40s that sort of smile of happiness, you’re really happy is a young in and then it sort of drops and then peaks again in your later years. I wonder if that’s relevant to him.

GIOVINAZZO: It could be but knowing Dr. Kahneman I’d bet it’s based on some very hard data which I just haven’t seen.

RITHOLTZ: Now, the other data on this one point which I find fascinating, it turns out that once you control for life event such as divorce, the numbers skew much higher and if there’s a divorce in there, no matter how much money you have, it ends up being miserable or so some economists have referenced.

GIOVINAZZO: You know, Dick Thaler has a phrase which is your happiness is the minimum of yours and your spouse’s happiness.

RITHOLTZ: That makes sense.

GIOVINAZZO: So, you should maximize accordingly.

RITHOLTZ: That makes perfect sense. So, you’re at University of Chicago with Thaler. Did you ever participate in any of his studies as a subject?

GIOVINAZZO: I don’t think I did actually. You know, the standard psychological experiments usually use a little bit of misdirection and if they say —

RITHOLTZ: Of course.

GIOVINAZZO: — it’s about one thing but it’s really about —


GIOVINAZZO: — something slightly different, it makes it a little bit tricky if you have people who know too much of the psychology to be able to see through what are you really asking about.

RITHOLTZ: You would be the ringer of the table —

GIOVINAZZO: Possibly. Possibly.

RITHOLTZ: — that would throw it off. And let’s talk a little about blind spot bias, the people’s own failure to recognize their own biases even if they’re knowledgeable about biases and other people that was also discussed with Professor Kahneman.

GIOVINAZZO: Part of it is our biases are hardwired. They really come deep innately from how we think about the world. You know, it’s funny, the conversation I recently had with Danny that you witnessed, he pointed out I was making a joke that the research that he started uses this complicated word heuristics, that people use a heuristic, which is really just a rule of thumb. And I teased him about why don’t you call it a rule of thumb which is an English phrase that people understand.

RITHOLTZ: He reacted very strongly to that.

GIOVINAZZO: He also reacted brilliantly to point out that a rule of thumb is a deliberately chosen approximation but in fact our biases come from unconscious rules of thumb. In fact, he said rule of thumb is, therefore, the wrong word because it’s an unconscious process that makes us quickly jump to conclusions that are in fact incorrect.

And it’s precisely because it is these unconscious processes that make us do this that make it so hard to overcome our biases even if we’re aware that we should be looking out for them.

RITHOLTZ: Let’s jump right into that and describe what it’s like to build the firm based on known behavioral biases. How is the firm structured and how does it take advantage of all of these errors that investors make?

GIOVINAZZO: Yes. Everything we do is based on the study of investor mistakes and we try to invest on the opposite side of where we think other investors are making those mistakes.

Broadly, psychologists have documented dozens of mistakes but you can group them in two categories, sometimes people overreact, sometimes people under react. The trick, of course, is knowing when they’re likely to do one versus the other.

And then we try to buy when people have overreacted the bad news, they’re panicking, or when they’re under reacting to good news and we think that prices are going to go up even further and faster than they realize.

RITHOLTZ: So, if you were managing a portfolio at a — the current portfolio you’re running at a different firm, I would say, it looks like Raife is managing a small-cap value-tilted Fama-French factor portfolio. But that’s not exactly what you’re doing is it?

GIOVINAZZO: No. So, I would say that the overreaction to the bad news is naturally going to find stocks that have bad news. They’re going to be, guess what, more likely value strategies, value companies.

And in fact, we run a strategy that is a pure overreaction strategy and that does look like small value, of course, by construction. The strategy that I run is actually a small-cap core because it includes this examination of do we think people are under reacting to good news and therefore, it sort of removes the value tilt and ends up being a core portfolio because of that reason.

RITHOLTZ: And I just have to reference that at the Thaler-Kahneman events. I was sitting at the overreaction table and all the tables had cognitive biases. Instead of Table 1, Table 2, Table 3, it was table confirmation bias, table overreaction, etcetera. I found that terribly amusing.

So, let’s talk a little bit about small cap. The argument can easily be made that small caps outperform over time because you’re taking more risk. You have liquidity risk. They’re much less followed by analysts. They’re much less known and therefore, that outperformance on a risk-adjusted basis goes away or does it? What do you — what are your thoughts on the so-called small-cap premium?

GIOVINAZZO: So, I think the reality is that some of the small-cap premium is truly risk and most of the small-cap premium is not risk. But it’s both. On a side note, you know, academics often write papers that are either everything’s at mistake —


GIOVINAZZO: — or everything is rational. But if you talk to them, almost all of them agree it’s both. So, specifically, let me talk about the small-cap premium.

You mentioned liquidity risk. I think that there is some risk of owning things that have less liquidity that if you need to sell them they’re going to perform worse. Although interesting note, in general, stocks that have lower liquidity actually have a lower beta, they have lower exposure to the market.

It appears that when the market panics, people tend to sell their most liquid names —

RITHOLTZ: Sell what you can.

GIOVINAZZO: — not their least liquid —

RITHOLTZ: Of course.

GIOVINAZZO: Exactly. So, the intuition of when people are desperate, the least liquid will be terrible, it doesn’t do bad on a price cent in terms of prices. It is, of course, a challenge if you really do need to sell it though.

RITHOLTZ: Makes a lot of sense. So, if it’s not all risk, where does the rest of return come from in small-cap?

GIOVINAZZO: So, you mentioned the other issues that there’s less coverage —

RITHOLTZ: Unfollowed, not a lot of analysts.

GIOVINAZZO: Unfollowed. Not a lot of analysts.

RITHOLTZ: Not well known in fact.

GIOVINAZZO: Not well known. So, to me, none of those actually are truly risk. They’re sort of a lack of comfort and I think that’s where a lot of the return can come from in that, you know, people don’t know about them and so they’re willing — they’re unwilling perhaps to take a gamble on them and invest as much in them.

But that really truly isn’t risk in the sense of risk to your money. It’s just perhaps risk to your psyche and I would call that kind of risk to your psyche something that is really more behavioral.

And I should add there’s one other element that I do think really matters and this is a little bit technical, but if you think about it, once you assume that there are errors in the prices of companies, naturally, if a company is overvalued, it will be a little bit bigger. If that company is undervalued, it will be a little bit smaller.

So, as soon as you think that there are any errors, sorting on size is not going to be a very direct way of finding those errors but it will be correlated with the errors. And so, I do think that matters as well that just beaten-up stocks are more likely to be small just because any mistake people made would automatically make them a little bit smaller than they really should have been.

RITHOLTZ: The description of the psychological risk of not being familiar with the names reminds me a little bit of the home country bias that people tend to be wildly over weighted around the world. Wherever you live, you own the companies you’re familiar with, the CEOs you see on local television and it creates a very distorted portfolio.

GIOVINAZZO: You’re quite right and, of course, the United States is such a large economy and it’s so well diversified. Having a home bias in the United States is probably fine.

Furthermore, a lot of the largest companies in the United States nowadays, they have international operations. Yes, they are getting exposure but what’s fascinating to me as always, you take a small company in Norway and Norwegian investors are more likely to invest at predominant amount of their investments in Norwegian stocks, that really doesn’t make sense overall.

RITHOLTZ: Other than the fact that they’re so familiar with those —

GIOVINAZZO: It does give them —

RITHOLTZ: — executives and —

GIOVINAZZO: It does give them psychological comfort.


GIOVINAZZO: And, you know, there might be a value to that. But if from purely rational, all I care about is my money and my return standpoint.


GIOVINAZZO: We’re taking a lot of risk with the home bias.

RITHOLTZ: It seems that things that investors do that give them comfort don’t seem to work to their advantage in the markets. Is that a fair statement?

GIOVINAZZO: I think that’s a very fair broad statement. It matters a little bit exactly how you implement it of course. But the idea is if people are going to pile into something because it makes them feel good and should cause the returns on that particular feel-good strategy to be a little bit lower.

RITHOLTZ: So, here’s the key question I have about the portfolio you manage. When stocks get thrown out by a large group of investors and they become a little smaller and the price becomes a little lower, how can you identify when it is either a behavioral issue of people overreacting or genuine lead decaying fundamentals?

So, a lot of the REITs that own malls and other things, they’ve gotten shellacked. Is this a permanent change in society or people are overreacting?

Maybe that’s not the best example. We could use steam engines and leather belt companies back in the early days of the Dow. But the key question is how can you tell the difference between when something is fundamentally deteriorating on a long-term secular basis versus investors’ overreaction?

GIOVINAZZO: Yes. That, of course, is the key question and, you know, naturally I could talk for hours and hours about the details of how we implement stuff and just touch the surface of how we approach it.

But here’s the broad outline, our approach is to try to look at cues where we think other investors are likely to make mistakes here. Some of the cues we use for example in the retail space because we see a lot of overreaction to problems in retail right now are to say an individual company basis, what are the insiders doing, what is the management doing, are they buying back shares of their company or they selling shares, that’s our entry point to say is there a real problem here.

And we’re going to look at how have investors reacted to the news. In this case, it’s pretty easy to understand there’s a lot of negative news out there about retail. But then we do also have to do the hard work of digging in and saying, OK, what is the real opportunities of this individual firm?

Part of our approach is to try to not make an overall description, overall analysis of their people overreacting to, you know, mall REITs but instead really look at individual companies and say, how about this particular REIT. And when you dig in individual companies, of course, they have individual nuances that can make a real difference.

RITHOLTZ: Let’s talk a little bit about the success your fund has had over the past half decade. Prior five years, you’ve compounded at 17 percent a year beating 99 percent of other small-cap funds. So, what do you owe this success to and what are your expectations about this fund going forward?

GIOVINAZZO: The success is due to our process and that’s the key to how we invest. We are trying to spot where other investors might be biased. Make no doubt, I’m biased just like every other portfolio manager at Fuller & Thaler, just like you, just like everyone and it’s our process that lets us overcome those biases and find opportunities.

And we think that’s going to continue working. Obviously, no guarantees. My compliance person will get very mad but maybe any kind of guarantees. But we continue to have —

RITHOLTZ: You’re very comfortable with the process.

GIOVINAZZO: Yes. We think it makes sense when investing to try to figure out where other people making a mistake.

RITHOLTZ: So, here’s the key arbitrage away the alpha question, you guys have carved out a niche in behavioral investing and, obviously, when you have people like Richard Thaler and Danny Kahneman involved that gives you big edge. But what about other firms recognizing this and coming into the same space and saying, hey, we want to catch some of that behavioral alpha as well.

Do you see any — are there any competitors and do you see any competitors coming in eventually?

GIOVINAZZO: Yes. We see a lot of folks talk about behavioral finance, it’s a fun topic. People like to use it to justify what they’re doing. But honestly, we have never seen really anybody who’s doing exactly what we do and there’s a few reasons for that I think.

One is doing what we do requires not doing a lot of the traditional things that cause bias. That makes people uncomfortable. We talked about how people like to do things that leave them comfortable. Omitting some of the steps that people typically do will make people uncomfortable and really focusing on the way we do just on the mistakes often can make other folks uncomfortable and so they don’t do it for that reason.

And as you know as we talked about in the beginning, these biases are hardwired. So, it’s not that the investor mistakes are going to go away but you really need to have a process that’s laser focused on finding them to work in the long term.

RITHOLTZ: So, we discussed earlier Fama and Thaler play golf together, they’re buddies. Just clearly inefficiencies in the market over the short term, are markets mostly kind of eventually sort of efficient? Like how do you think about markets over longer periods of time?

GIOVINAZZO: Yes. You know, Fischer Black had a rule that he said markets are efficient, probably do a factor of two that prices are within plus or minus two times the correct price.

Now, you tell me, that’s actually pretty reasonable in the scale of things to say —


GIOVINAZZO: — that’s reasonably efficient. OK. They’re not 10 times what they should be. On the other hand, that links a lot of room for error.

RITHOLTZ: Hundred percent it’s a giant swing.

GIOVINAZZO: Yes. That’s a big swing. So, I think it depends on how you think about in defining what should efficiency be. The idea that all prices are perfect I think is about as ridiculous as thinking all people are perfect.

But the idea that they’re pretty good is about as reasonable as thinking that most people are pretty good. But there’s a lot of room still to find improvements that we look out for.

RITHOLTZ: So, if I had to define the era following the financial crisis, I think most people would look at it as the era of indexing and simultaneously the era of ETFs. The question that comes up over and over again is what does indexing do to price discovery, how does that affect the ability to identify mispricing?

GIOVINAZZO: Yes. So, I think that ETFs and indexing have a variety of impacts. One impact is that there’s a bunch of people who used to be analyzing individual securities that aren’t anymore. That’s going to make individual prices as you can imagine a little bit less efficient.

On some level, that makes our job as an active manager a little bit easier because you’ve taken some of the people who used to be analyzing things out of the game. At the same time, I think there are increasingly more swings that happen because people are moving into utilities ETF and now they’re moving into a financial ETF and now they’re moving into a smart beta ETF and there are a lot of movements that are happening more at the macro level in terms of individual ETF decision-making.

And, you know, the funny thing is, I mean, I heard one phrase, this is sort of an extreme phrase that indexing is communist in the sense of you’ve trusted everybody else to set the price. You really do have that confidence that the market is reasonably efficient at the price that you’re buying things is right and that’s not a bad approximation.

But I think — I do think you can do a little bit better. I’m biased of course because I’m an active manager.

RITHOLTZ: I’m pulling this from memory. I believe it was AllianceBernstein called indexing Marxist, but I’m not positive. That was from the search keys.

GIOVINAZZO: You might be right.

RITHOLTZ: But the same issue applies. So, here’s the counter argument about indexing and it’s a behavioral argument.


RITHOLTZ: Humans are irrational. We’re not especially good at stock picking. We’re not especially disciplined at staying on even if we come up with a quantitative method. We have a tendency to get caught by narratives and stories.

You know, if I just index and forget about it for 40 years and better off than getting in my own way, what’s the counter to that from a behavioral perspective?

GIOVINAZZO: I think you’re right that people get in their own way all the time. You know, Dick Thaler’s got a phrase, instead of watching CNBC, you should be watching ESPN.

The idea being that tracking how you’re doing every day is going to cause tremendous unhappiness and it’s going to lead to more biases. Actually, we worked with — separate know, we worked with one of our academic advisors, Professor Joey Engelberg who’s a UCSD and he’s done research that when the market goes down, there’s more admittances for heart attacks at the hospitals around the country.

RITHOLTZ: Not surprised.

GIOVINAZZO: Yes. It really makes people unhappy. So, to set it and forget it I think actually is right. At the individual investor level, people should set it and forget it.

I think there’s a role for picking the right active manager as part of your set and forget strategy but it’s certainly true that trying to make those individual timing decisions, you’re going to be very subject to biases.

RITHOLTZ: The other favorite example, and I’m trying to remember who brought this up recently, is imagine if you got your home price quoted every single day and it would make people crazy. You wouldn’t be able to deal with it.

You get a price when either you put up your house for sale or one of your neighbors house sells and even then, we redid our kitchen, they didn’t, etcetera. So, what is the daily price action tell us about investor psychology?

GIOVINAZZO: Yes. You know, I’m sure you’re aware that no matter what happens in the market, people are always on the news spinning here’s why it did what it did. But the reality is I got to tell you as an academic, we see a lot of movements that we don’t really know why it moves.


GIOVINAZZO: Here’s a different way, a more technical way of phrasing it. The academic perspective more broadly is that most of the price movements that happen in the market are changes in the required return, not changes in cash flows.

What that means is it’s not that people have a new updated vision generally about how well the core business is going to perform rather they’ve changed their mind and said, I’ll accept a little bit lower return and therefore the price went up or I’ll except a little bit higher return so I demand a little bit higher returns if the price went down.

But for you and me, that’s equal to the same thing as they’re just noise, it just moved for a kind of no reason.

RITHOLTZ: And as long as you brought up noise, I understand Professor Kahneman is working on a new book on noise. I’m absolutely fascinated by that. Why is it that we’re so compelled to take what appears to be to the educated eye random noise and impose a narrative story line on that drunkard’s walk?

GIOVINAZZO: That ability to very quickly find patterns is crucial to learning. Think about how quickly toddlers learn new words. Think about how quickly kids figure out what the rules of social interaction are and they do it all by just watching a few times.

Sometimes as I’m sure you’ve seen toddlers might hear a word once and then they start being able to use it. Why? Because —

RITHOLTZ: Especially a bad word.

GIOVINAZZO: Yes. Exactly. Of course, they figure that out. And why? Because we’re experts at quickly identifying patterns and that’s, of course, useful from an evolutionary standpoint.

But then it trips us up on things that truly are random. We start to see patterns that don’t exist and we interpret that in ways that then can cause bias.

RITHOLTZ: So, a big part of the way you manage the portfolio is capitalizing on overreactions. What do we see more of, overreactions to the upside based on greed and enthusiasm or overreactions to the downside based on risk aversion and panic?

GIOVINAZZO: You see both. I think you see a little bit more overreactions to the downside. Now, I say that but I may be biased because we’re focused on overreactions to the downside. That’s when we buy.

If there’s a company that’s overhyped, I’m not going to buy it and we do a little bit of long-shore investing. But for the most part, we’re not going to pay attention to those superhyped stocks. And so, maybe that’s why I’m giving a biased answer that it seems people more likely overreact to the downside because that’s what we focus on.

RITHOLTZ: Can you stick around a little bit? I have a few more questions to ask you.


RITHOLTZ: We have been chatting with Dr. Raife Giovinazzo of Fuller & Thaler where he manages the behavioral small-cap equity portfolio. If you enjoy this conversation, be sure and check out our podcast extras where we keep the tape rolling, continue to discussing all things behavioral.

You can find that at iTunes, Overcast, wherever finer podcasts are sold. We love your comments, feedback and suggestions. Write to us at

You can check out my daily column on Follow me on Twitter @Ritholtz. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.

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RITHOLTZ: Welcome to podcast. Raife, thank you so much for doing this. This is really a fascinating topic that I am, you know, have been enamored for decades about and offline, we were talking about the problem with our cognitive issues is we evolved for a very different purpose.

It’s — I give a presentation where I used Viagra as an example. It’s off label. Originally, Viagra was a hypertension and heart disease product and as they do when they do the studies, they asked the subjects any side effects. So, yes, my wife has locked herself in the bathroom and she won’t come out. Maybe we have a different use for this product.

So, the question that comes up time and again with all these biases and all these cognitive issues was the human mind or has the human mind evolved for very different purposes than we are currently using them?

GIOVINAZZO: Yes. We ere evolved in an environment where there was not a news media, there were not graphs and charts that we had to interpret.


GIOVINAZZO: There was no Excel, no financial statements. We were designed for very rapid decisions if you hear rustling in the bushes, you better get out of the way quickly because it might be a lion, not how do I plan a 20-year investment in a power plant. That’s not what we’re designed for.

RITHOLTZ: And so, we end up applying our cognitive skill set to a bunch of issues that we really are not built for.

GIOVINAZZO: Yes. Let me give you an example which I think will be illustrative. Maybe I’m biased because it was the research I did with Dr. Kahneman at Princeton. I began trying to do research on how do we come up with the short list from which we make a decision because the research on decision-making is all about choices.

And in the process of trying to answer this question of how do we come up with a short list, I realize the answer is we don’t come up with a short list. In fact, we’re sort of hardwired to instantly jump to the answer that what we’re doing is something which in cognitive psychology is often called problem solving as opposed to choosing.

But it’s precisely because we want to instantly get to the final answer that we’re very lousy at making choices when we have a range of choices that we need to think carefully about.

RITHOLTZ: You know, it’s funny you say that. I — years ago on a trading desk, someone would bring an idea to me and very often, I go, that piece of junk. And I eventually learned that that reaction is, hey, maybe there’s an overreaction on everybody’s perspective because when someone brings you — I was a fan of Apple, when the iPod, not iPhone, iPod first came out, every person I show that stock to, same reaction, piece of junk company going out of business.

The stock a six-for-one split ago when a two-for-one split before that, I want to say it was 15 with 13 in cash and that reaction of junk, that’s that immediate response as opposed to Professor Kahneman would call it system two where you’re actually thinking it through.

GIOVINAZZO: Yes. You know, here’s a funny fact related to that immediate emotional reaction. Our ability to know whether we like someone operates far faster than our ability to remember any fact about them. We know whether we like that person before we can remember their name because that is what — if you think about it, we’re built to be able to make very rapid is-that-person-a-friend-or-do-I-need-to-run-away decisions.

But it can really trip us up when analyzing something abstract like a stock that we’ve got decades to invest in, we’re not invest in. That’s not a good system to be able to make a decision in milliseconds even though from a evolutionary standpoint was quite useful back when we were cavemen and cavewomen.

RITHOLTZ: Right. That same hey-here’s-an-instantaneous reaction which has a purpose in keeping you alive, P.S., the people who did not have that particular hardwire, well, none of their progeny are around here.

GIOVINAZZO: They got eaten by the wire.

RITHOLTZ: Right. They were literally people’s lunch. All right. So, I only have you for a limited amount of time. Let’s jump to some of our favorite questions that we asked all of our guests. What’s the most important thing people don’t know about you or your background?

GIOVINAZZO: I think the important thing to me that maybe people don’t know given the focus on behavioral finance that we have is my father is a retired professor of accounting. So, I’m actually one of those geeks who likes analyzing financial statements as well.

It’s not pure psychology. Sometimes, people think it’s all about psychology. But what we do is a combination of finance and psychology and honestly, it’s the finance that’s more important than the psychology but the psychological combination in addition sort of changes the flavor of everything.

RITHOLTZ: Gives us a different dimension. Around now is when I ask people who their early mentors were but we know at least two of your mentors, Danny Kahneman and Richard Thaler, any other mentors you want to share? That’s — those are two pretty good names to drop.

GIOVINAZZO: They’re pretty good. They’re pretty good. My father was a mentor of course. I did a lot of consulting work. Worked for him in his consulting business when I was in high school and college and that was some useful training as well.

RITHOLTZ: So, let’s talk about investors. Who influenced your approach to putting capital at risk?>

GIOVINAZZO: Yes. I’ve been obviously tremendously influenced by all of the research in behavioral finance. There are patterns to people’s mistakes and therefore, there are patterns for investing that make a difference. And if you follow those patterns, you can earn higher returns.

RITHOLTZ: And let’s talk about books, this is everybody’s favorite question, what are some of your favorite books be they fiction, nonfiction, investment related or not?

GIOVINAZZO: That’s a hard one. I’ve got a lot of favorite books. I do think, you know, I have to give a plug for “Thinking, Fast and Slow” by Daniel Kahneman. It’s incredibly comprehensive and that can also read as a little bit slow and dense but you really learn a tremendous amount from reading it.

I’ve learned a lot of that at the feet of the master but I think for people who haven’t had that lucky experience, it’s a great book for learning one of these biases.

RITHOLTZ: It’s wonderful and if you read the whole thing in one sitting, it’s dense. The first half of it really flies.

GIOVINAZZO: Yes. You know, other books that I have enjoyed, I’m a big science fiction and fantasy fan.


GIOVINAZZO: I don’t know.

RITHOLTZ: Me, too.


RITHOLTZ: Tell us some of your favorites.

GIOVINAZZO: Yes. You know, I’ve got a bunch. “The Kingkiller Chronicles” are one I’m really hoping Patrick Rothfuss will hurry up and write that third book. I don’t know if you’ve read that.

RITHOLTZ: I have not.

GIOVINAZZO: Yes. I love the books the “Game of Thrones.” Obviously, that’s quite popular now. I wish George R.R. Martin would go ahead and finish those books as well. Those are some — you know, I like a lot of those classics in that realm. It’s kind of fun.

RITHOLTZ: Any other science fiction authors that float your boat?

GIOVINAZZO: You know, I really like Vernor Vinge. I don’t know if you’re familiar him.

RITHOLTZ: I am not.

GIOVINAZZO: He’s a science fiction author. He’s got a neat book called “Rainbows End” which is trying to imagine sort of a near future where there’s a tremendous use of artificial intelligence and what is the economy look like, which I think is pretty smart. He’s got some other good books. “A Fire Upon the Deep” that deals with artificial intelligence I think is kind of neat.

RITHOLTZ: Quite interesting. That’s a good list. Tell us what you’re most excited about today? Like these days, what really do you find fascinating?

GIOVINAZZO: You know, I never stop being fascinated by investing and by behavioral finance. I know it seems odd but that’s part of what makes it so easy to do. What I’m doing is that there’s always new wrinkles in the kinds of mistakes that people make.

I also like to apply to myself and say what — which of these mistakes am I making and how can I try to correct that. So, it’s a perpetual passion.

RITHOLTZ: It’s endlessly fascinating. There’s no doubt about that. Given that you work in portfolio management, what do you see is the next major shifts that are going to take place?

GIOVINAZZO: Yes. Well, one shift clearly is increasing use of passive investments and how does that fit with active. You know, I think it’s no surprise there’s some reasonable arguments in more efficient spaces, may be in large gap to consider passive, where you think in inefficient spaces like small-cap really doesn’t make sense to be passive but that continual trend is clearly going to be happening.

I think a second trend that’s going on is how do we incorporate all of the information and what’s the role of artificial intelligence in trying to be used for predicting returns. On that note, I have a little bit of a different perspective than a lot of people. People — I think artificial intelligence is obviously incredibly powerful but it needs a tremendous amount of feedback.

If you think about it, if you want to build an AI system to do minute-to-minute or second-to-second trading, there’s a tremendous amount of feedback that’s going to be very powerful. If you’re trying to predict five-year returns all over a 25-year period, you only have five data points.


GIOVINAZZO: There is no way to build an artificial intelligence, just feed at the data and let it figure things out. That’s not going to work. But I’m sure that a lot of people are going to try.

RITHOLTZ: So, tell us about a time you failed and what you learned from the experience?

GIOVINAZZO: Well, I have what I think is a rather amusing investment failure story.


GIOVINAZZO: So, during the original Internet bubble around —

RITHOLTZ: Late ’90s.

GIOVINAZZO: Yes, late ’90s. You know, there was somebody put out a report that said, is going to double in the next year, and I just said, this is ridiculous. No. You can’t predict that the stock is going to double. This is crazy.

RITHOLTZ: Henry Blodget. That was a very famous piece. He put out at Oppenheimer I want to say in 1998.


RITHOLTZ: And then eventually moved over to Merrill Lynch and things went awry from there.

GIOVINAZZO: Yes. Exactly. So, I decided, you know what, I’m going to short this in my personal portfolio. At that time, I had about $25,000 in savings and I decided was going to put on a $5,000 position on the theory of, well, if this actually does double in a year and I lose $5,000, I can handle that in the short term and in the long term, I hope that I’m going to have a lot more savings and, you know, this wont break my lifetime earnings, I’m not going to be bankrupt forever.

Well, first of all, I couldn’t borrow the shares for three weeks.


GIOVINAZZO: Because lots of people were trying to short the Internet stocks at that point in time during which time the price went up 30 percent. Brilliant me said, this is great —

RITHOLTZ: Even better.

GIOVINAZZO: — even better.


GIOVINAZZO: Even better time to short the stock. Finally, I put on the position and by the way, instead of doubling in one year, the price then went to double at the original call in another two weeks.

RITHOLTZ: Yes. It was like a month and a half or two months of crazy —

GIOVINAZZO: Yes. It was crazy fast at which point in time, now, I have a position which is closer to $10,000 short in which case now if this doubles again and I lose $10,000, now, I’m starting to have some problems.

Unsurprisingly, I was working as a strategy consultant at that time but I was spending a lot of time watching daily — the minute-to-minute price movements of while I got to feel emotionally what it feels like to be losing money and worried about things.

At one point in time, I decided as I kept going the wrong way, kept going up, up, up, gee, I need to reduce this position. I did something complicated just because it had taken three weeks to borrow the shares and that I’ve shorted against the box. I’ve actually bought 75 shares —

RITHOLTZ: Sure. You’re long and short at the same time.

GIOVINAZZO: I bought 75 shares while still being short 150 shares. This was the massive amounts of money I was investing.

RITHOLTZ: So, you covered half of the position —

GIOVINAZZO: I’ve covered half of the position.

RITHOLTZ: — effectively.

GIOVINAZZO: And I think this is really an impressive accomplishment frankly because I was doing this sort of panicked decision during the day, I managed to close this position, i.e., buy the 75 shares at literally the high point of the day and then as — during the day it then started to drop for the first time and I thought, what am I doing, this is crazy, I’m not supposed to be — this was my whole thesis and now it’s not working.

So, I undid a portion of that and I managed to both buy at the high of the day and sell at the low of the day in the same day which I think is a rare accomplishment and I learned an important little fact by the way. The published prices are only for round lots of a hundred shares and because I was trading at 75 shares, they’re not quoted prices and in fact, I managed to sell below the low of the day —

RITHOLTZ: That’s crazy.

GIOVINAZZO: — for my 75 shares. You know, eventually — I held on the position for years and eventually, the position kind of came positive and consistent with every behavioral bias once I was able to declare victory of, OK, I have no longer lost money then I close out the position. But longer term, look at how well Amazon has done.

RITHOLTZ: I would — the better trade was closed at the position and then go long and —

GIOVINAZZO: Yes. Exactly. If you look —

RITHOLTZ: — 23,000 percent later.

GIOVINAZZO: — longer term —


GIOVINAZZO: If you look longer term, they’ve been one of the successful ones. There was a lot of insanity during the —


GIOVINAZZO: — during the financial crisis. But I in my naïveté at that time, 20 plus years ago, picked one of the wrong things to bet against. So, that bet was fundamentally wrong.

But I’ll tell you, I felt at that time I did have the wisdom to know, am I going to learn something here, I’ve learned a lot. That one of the formative investment experiences for me about knowing about proper position sizing, knowing when to take risks.

And one of the lessons that I have, too, is when you see something that looks crazy , I’ll tell you I think Bitcoin looks crazy, you’ll be very, very wary of shorting it. I think the Keynes quote was the market can remain irrational a lot longer than you can remain solvent.

RITHOLTZ: To save the very least. What do you do for fun? What do you do outside of the office either to relax or to stay physically fit or just for laughs?

GIOVINAZZO: Yes. Two of the hobbies of mine is, one, I coach my kids in sports, which one nice thing actually about being on the West Coast is because — and being on market hours actually get out of work — start at some insane hour in the morning but get out of work in time to actually go coach a baseball practice or soccer practice.

RITHOLTZ: Markets close at 1 o’clock.


RITHOLTZ: You could be home by the time they’re back from school.

GIOVINAZZO: I’m not leaving at 1 o’clock but I can make a 5:30 baseball practice so that’s good. Second thing that I do is I love board games. I mean, I’m super geek. So, I play a lot of board games. I actually make — tried making some board games to my friends.


GIOVINAZZO: I mean, I’m ultra geek.

RITHOLTZ: What board games do you like?

GIOVINAZZO: You know, I like a lot of the board games that have been quite popular. I like a game, you know, Ticket to Ride is a simple game but it’s pretty good. Another game that we have played a bunch, this is something called side (ph). That’s a little bit of a war game. It’s a little bit stranger. Just to give you an idea, I own about 200 board games.


GIOVINAZZO: So, asking me to pick my favorite, that’s kind of tough.

RITHOLTZ: See, that’s the most important thing people don’t know about your background. And I assume you’ve seen the “Game Night” the movie?

GIOVINAZZO: You know, it’s funny. My wife —

RITHOLTZ: That’s made for you.

GIOVINAZZO: Exactly. So, my wife and I tried to go to that on a date a couple of weeks ago after being out I think a month and every movie theater we went to have been sold out.


GIOVINAZZO: So, we ended up watching a different movie. So, it’s still on our list.

RITHOLTZ: The weird thing is these movies come and go so quickly these days.

GIOVINAZZO: I know. I know.

RITHOLTZ: They’re in theaters for two weeks and then they’re gone.

GIOVINAZZO: But the good news is now we can watch any of them on demand.

RITHOLTZ: On the net. Right. You might want to think about shorting Netflix which continues to go higher. That would be the other side of your habits (ph) I’m sure.

GIOVINAZZO: I’ll be honest, I don’t understand Netflix. They’re hemorrhaging cash.

RITHOLTZ: They just did a $1.5 billion financing to acquire more content.

GIOVINAZZO: Yes. Exactly. I don’t get them, but I have learned, yes, I’m not going to short that.

RITHOLTZ: Right. Yes. Sometimes, you don’t want to get in front of the runway locomotive. Let somebody else be the hero.

And our last two questions, what sort of career advice would you give a millennial or recent college graduate who came to you and said, I’m thinking about a career in asset management?

GIOVINAZZO: So, let me give you some general career advice that I think is very important for young people and then I’ll give some specific advice for asset management. My general advice to people is you hear these phrases do what you love and I think the correct phrasing is do something you love.

The distinction being don’t ask yourself what’s the thing I love the most of all in life because it’s going to probably something that has no commercial value. I love playing video games the most in life.


GIOVINAZZO: Well, for me, I’d seriously consider it because I love board games, maybe I should become a board game designer. And one of the best decisions I ever made was, well, that could be a hobby, I can spend some time doing this for fun but I should actually pick a job that I also love but not try to figure out what’s the thing that’s absolute most fun.

So, that’s my advice, pick something you love and enjoy but don’t try to pick the thing you love the most unless you’re lucky enough to have it be something that’s highly lucrative.

The second advice specific to asset management is I just think there’s a tremendous power and maybe this is my bias from having come from some firm that specializes in behavioral finance, there’s tremendous power to understanding, are you in a realm where you need to sort of figure out where other people are making mistakes, which I would say is true in markets like the stock market? Were you in a realm where what matters is are you making the mistake in which case you’ve got to do the financial analysis well?

So, the distinction I would sort of make is I’ve never heard of behavioral private equity. If you’re the only person bidding —


GIOVINAZZO: If you’re the only person bidding on a company, you just got to do the analysis right, you want to focus on financial knowledge. If you’re competing with lots and lots of other folks, then I think being an expert on what are the mistakes other people are going to make that’s going to be more important. So, it’s good to know which area you’re trying to focus on and get an expertise that matches that area.

RITHOLTZ: And our final question, tell us something you know about investing today that you wish you knew 20 years ago.

GIOVINAZZO: Well, I already told you that story. I wish I knew —

RITHOLTZ: Don’t short Amazon. Got it.

GIOVINAZZO: Yes. Don’t — no. It’s be aware of betting against extreme hype because it can go the wrong way.

RITHOLTZ: Much longer than you would expect.


RITHOLTZ: We have been speaking with Dr. Raife Giovinazzo of Fuller & Thaler. If you enjoy this conversation, be sure and look up an inch or down an inch on Apple iTunes where you can see any of the other 200 such conversations we’ve had previously.

We love your comments, feedback and suggestions. Write to us at I would be remiss if I did not thank our crack staff who helps put together these conversations each week, Taylor Riggs is our producer/booker; Madina Parwana is our audio engineer/producer; Michael Batnick is our head of research. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.

UNIDENTIFIED FEMALE: Masters in Business is sponsored by Harvard Business School Executive Education, offering four comprehensive leadership programs that transform rising executives into competent business leaders. To learn more, visit That’s



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