Where are the Financial Geniuses?

A new investment commentary from Rob Arnott’s firm, Research Affilliates, proposes investment firms do their part to cultivate budding financial geniuses in their midst.

The unusual topic choice for its May newsletter may be par for the course for Research Affiliates. The firm is recognized for its outside-the-box approach to index construction.

Indeed, the firm has even been granted a patent for its methodology of weighting its indexes on the basis of investment fundamentals (as opposed to conventional weighting according to market capitalization).

So perhaps it is not suprising that the firm’s vice president of brand management, Phillip Lawton, would delve into a topic that reinforces the niche research firm’s market position and identity.

Lawton notes that financial geniuses are no more common than scientific geniuses like Einstein and Edison.

When a Harry Markowitz comes along and proposes modern portfolio theory and efficient markets hypothesis, or a William Sharpe develops his capital asset pricing model, their conceptual frameworks “have equipped several generations of investment professionals to…vastly increase the range of available strategies and instruments for taking on and laying off risk.”

But Lawton worries that the pace of financial genius could be mirroring a slowdown in the natural sciences, where the vast amount of knowledge required to reach the conceptual frontier has become harder than ever to attain.

Cracks are appearing in the prevalent view that markets are efficient, with much evidence, coming particularly from behavioral finance, that “flesh-and-blood investors are at best imperfectly rational.”