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How to Apply an Academic Theory to the Real World

Barry Ritholtz

(Bloomberg Opinion) -- 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 and Fama discuss their 50-year relationship in our Masters in Business conversation, streamed live from the University of Chicago Booth School of Business.

Fama discusses how computers eventually led to the efficient-market hypothesis, meaning market incorporate all available information in setting prices; the technology allowed researchers to evaluate how well active managers who pick individual investments were actually performing. Before that, there was no quantitative evidence or data to gauge managers' performance. The new data-crunching technology also let researchers test of Fama’s theories, and for the first time, evaluate investing results after 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 life. He eventually started Dimensional Funds out of a spare bedroom in a Brooklyn, New York, apartment. He asked Fama to be on his board of directors, followed by Myron Scholes and Merton Miller, two other University of Chicago economics professors and future Nobel laureates.

The full video of the interview is here.

You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, Spotify, Google, Bloomberg 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, author of 11 books, including most recently, "Inside the Five-Sided Box: Lessons from a Lifetime of Leadership in the Pentagon."

To contact the author of this story: Barry Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”

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