Over 400,000 people visited Farnam Street last month to learn howto make better decisions, create new ideas, and avoid stupid errors. With more than 100,000 subscribers to our popular weekly digest, we've become an online intellectual hub. To learn more about we what do, start here.
Are economics teachers full of crap?
Apparently. The gap between what is taught about markets and what actually takes place is quite large…
This is the second in a series of articles that examines the practical applications of economic thought. Its focus is on the most fundamental aspects of finance theory, namely asset pricing. We discuss the major pricing models developed during the past 5 decades and critically examine their practical applications. Sadly, the results are not very encouraging. As with other academic economic disciplines, the gap between what is taught about the markets and what actually takes place is quite large, a gap in no way mitigated by the behavioralist arm of the subject. The seminal works of Sharpe and Lintner have provided us with a sound foundation upon which to build realistic pricing models, but unfortunately the unwavering acceptance of these models has resulted in research that merely cements their acceptance, discouraging an examination of how those pricing models could be adapted to suit the practical world.