Nobel Shout Out

So, the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013" prize has been awarded.  The Bloomberg version.

I have met Hansen, don't know Shiller personally, and know Gene Fama pretty well.   And I am (as they say here in the South) tickled at this result.  In the early 1980s, I discovered Fama's work, and spent about five years reading it all.  I have kept up a little bit since, and I think the combination of insight, elegance, and empirical connection is just unparalleled.

Here, for example, Gene has a series of papers that completely changed the way I thought (and think) about non-profits.  Non-profits are NOT "non-profit," they just happen not to be equity-financed.  That has implications for the way they behave, what their goals are, etc.  But it does not make them immune from incentives.  Check it out:

• Eugene Fama, "Agency Problems and the Theory of the Firm," Journal of Political Economy (April 1980). 
• Eugene Fama and Michael Jensen. "Separation of Ownership and Control", Journal of Law and Economics (June 1983). 
• Eugene Fama and Michael Jensen. "Agency Problems and Residual Claims", Journal of Law and Economics (June 1983).  

(you may want to tack on Michael C. Jensen and William H. Meckling (1976). “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics , to be fair).
 
Now, this is not a representative sample, by any means.  It is just where I came in, a self-contained little set of insights.  If you read those four papers, you will be a lot smarter.

I should add, I suppose, that Gene has been quite helpful in pointing out errors when he encounters them.  Pretty often, after I do an "EconTalk" episode, Gene will send an email that lists errors, factual or logical, that I have committed.  And he is, so far at least, always correct.

Congrats to Gene!

401K plans are screwing employees!

Interesting paper making this point by Curtis & Ayres.

A lot can go wrong in 401k plans. Investors can make bad choices and fail to diversify. But, the plan provider can also cause problems by giving investors a menu with lots of high fee options. Apparently this is common.

My University took us out of TIAA-CREF a couple years ago and sold us to Fidelity, who were only going to offer actively managed relatively high-fee funds. Faculty complained and some index funds and some TIAA-CREF grandfathering were allowed. But we constantly get bombarded with emails from Fidelity.

Anyway, Curtis and Ayres find in their sample that, "investors incur fees both at the plan and fund level. The combination of plan expenses, mutual fund fees, and menu limitations account for a loss of 10.2% of the optimal risk-premium." So the excess return is on average 10 percent lower because of high fees. They even show that the seeming overweighting of investors into their own company's stock in these plans is not necessarily irrational given the high expenses associated with a lot of the other options in many plans.

It's easy to say, we need regulation! But, this is already a fairly highly regulated industry, and more regulation is not always better.

As always, what would help is better financial education for average people, but this is not easy. Tyler and Alex's textbook has a chapter on investing, but I absolutely could not convince my students that they couldn't beat the market on average. Nor could I convince them that the high returns earned by some managers or funds were likely due to survivorship bias.