Eugene Fama and David Booth on the Birth of Modern Finance

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, what's your favorite financial movie? I don't think I've ever asked you that question.

Joe Weisenthal (0:29)

Really? I mean, trading places.

Tracy Alloway (0:31)

Oh, that's funny. That's mine too.

Joe Weisenthal (0:34)

Yeah.

Tracy Alloway (0:34)

And not only cause it's funny, but because it led to a real life development, which I don't think a lot of people know, but the CFTC set up something called the Eddie Murphy Rule.

Joe Weisenthal (0:44)

I didn't know that.

Tracy Alloway (0:45)

Because of trading places.

Joe Weisenthal (0:46)

I have no idea where you're going with this by the way.

Tracy Alloway (0:48)

I think there has been an enforcement action. Well, what I was going to say is, I think there is actually a lack of really good financial movies.

Joe Weisenthal (0:55)

Ah, okay. Here you go.

Tracy Alloway (0:56)

Trading places aside.

Joe Weisenthal (0:59)

Yes. I would agree with that.

Tracy Alloway (1:00)

Yeah. I know we have the Big Short and Margin Call was a very realistic description of what it's like to work at a bank. But I think we need more in our lives. And I think we also need financial movies that sort of delve into some of the theories of financial markets. And I get why we don't. Those are really difficult to illustrate in a visual way, but I still want them.

Joe Weisenthal (1:23)

Me too.

Tracy Alloway (1:24)

All right.

Joe Weisenthal (1:25)

Keep going, Tracy.

Tracy Alloway (1:26)

Okay. Well, the good news is I just watched one that fits into that category. So there's a new documentary out called Tune Out the Noise. And it's all about the birth of modern finance. And it features an absolutely all star cast of financial luminaries. So there are people like Merton Miller, Myron Scholes, Ken French, Markowitz, like the list goes on and on and on. And we're going to talk to two of them today.

Joe Weisenthal (1:57)

I'm really excited because I'm finally going to have a chance to ask, is it all priced in? Because this is my core belief about markets that is like, nope, it's all priced in. And yet there appears to be a financial industry that must on some level be premised on the idea that it's not priced in, but I always assume that it's all priced in. And so maybe we'll finally get an answer to this question.

Tracy Alloway (2:19)

I suspect the way you feel about the term premium is the way I feel about the efficient markets hypothesis. But let's get into it. We are speaking with David Booth, the founder and chairman of Dimensional Fund Advisors, and Professor Eugene Fama, who is of course a Nobel laureate. He is also a director at Dimensional, has had a long running intellectual partnership with the firm. He's also sometimes called the father of modern finance. I could keep going on with the honorifics here, but you get the idea, I think. So David and Gene, welcome to the show.

David Booth (2:51)

Thank you. Well, thanks for having us. I'm looking forward to it.

Tracy Alloway (2:55)

I guess I'll start with the obvious question, but why a documentary movie about modern finance? It is, as I mentioned earlier, not exactly an easy story to tell visually.

David Booth (3:08)

Well, it didn't start out to be a documentary. What happened was we started working with Errol Morris, he won the Academy Award for his film, Fog of War, a well-known documentarian, and we were talking to him about how we could use some of his expertise for our firm and he got really into it. He had not much background in finance and just got so fired up. He wanted to make it his film rather than our film, which I found to be very exciting.

Joe Weisenthal (3:37)

That's cool. We've done an episode with Dimensionals co-CEO, Gerard O'Reilly. Why don't you talk to us a little bit about the partnership of the two of you for people who are not familiar, for people who are going to be watching the film for the first time. The two of you have been working together for literally decades and really, two of the biggest names truly in the history of finance. What is the sort of short version of the sort of intellectual partnership and how this firm Dimensional came about?

Eugene Fama (4:09)

Well, David was my research assistant 55 years ago. David is the one. Anyway, he had been working with me for several years at the University of Chicago. Finally, he came to me and said, I see what you do and I don't want to do it.