Eugene Fama and David Booth on the Birth of Modern Finance
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Why did Fama and Booth decide to make a documentary about the birth of modern finance?
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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe Weisenthal.
Joe, what's your favorite financial movie? I don't think I've ever asked you that question.
Really? I mean trading places.
Oh, that's funny. That's mine too. Yeah. 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. I didn't know. Because of trading places.
I have no idea where you're going with it. And I think there
has been an enforcement action. Well, what I was gonna say is I think there is actually a lack of really good financial movies. Trading places aside.
Yes, I would agree with it.
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.
Me too. All right. Keep going, Tracy.
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, you know, there are people like Merton Miller, Myron Scholes, Ken French, Markowitz. It's like the list goes on and on and on. And we're gonna talk to two of them today.
I'm really excited because I'm finally gonna have a chance to ask, is it all priced in? Because this is my core belief about markets that it's 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.
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. Yeah. So David and Gene, welcome to the show.
Thank you. Well, thanks for having us. I'm looking forward to it.
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.
Well, it didn't start out to be a documentary. What happened was uh we started working with Errol Morris. You know, he won the Academy Award for his film Fog of War and well known documentarian. And we're talking to him about how we could use some of his expertise for our firm. And he got really into it.
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Chapters
7 chapters
1
Why did Fama and Booth decide to make a documentary about the birth of modern finance?
0:00–6:31
2
How did the partnership between Eugene Fama and David Booth begin and evolve?
6:31–15:40
3
What early research experiences shaped Eugene Fama’s view of market efficiency?
15:40–23:32
4
Why is data collection so crucial for testing the Efficient Market Hypothesis?
23:32–31:37
5
What is “smart beta” and does Dimensional Fund Advisors actually use it?
31:37–39:56
6
How have passive‑index investing and active management impacted market efficiency?
39:56–47:44
7
Can the Efficient Market Hypothesis be applied to the cryptocurrency market?
47:44–51:56
Speakers
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