…The psychology of economic decision making is made invisible by Modern Finance through a simplifying assumption, that humans are unfailingly rational, all evidence to the contrary. But to investors indoctrinated in the Theory, behavioral science is more than a test of faith; it’s the missing link. Human foibles can explain nearly everything in the investment industry, from the failure of active managers to the success of factor investing. Modern Finance disciples, the Believers, beg to differ. Through a combination of research and anecdotes, this is the first conflict the book aims to resolve in favor of the Skeptics. *

* The late Robert Haugen already used “Zealots” and “Heretics,” which are much better than “Believers” and “Skeptics.” But you get the idea.

Recent discussions about “mark-to-model” versus “mark-to-market” portfolio pricing are interesting, but miss the point. Why are equity funds still using short-term volatility as a risk metric? And risk-adjusted returns based on those short-term volatility measures to measure performance? It makes no sense in an asset class, equities, that demands a long-term view. My latest article is attached. If you’re interested in reading the article in II from January that precedes the online debate (that continues to this day), here is a link. My article, printed here in the original form sent to the WSJ, might make more sense if you aren’t current on the debate: https://www.institutionalinvestor.com/article/2bstqfcskz9o72ospzlds/opinion/why-does-private-equity-get-to-play-make-believe-with-prices

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