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Tuesday, April 26, 2011

Fox on the Wavy Line between Scholarship and Business

Myth of the rational market

One thing you notice about the difference between finance and law scholarship is that while the legal corporate guys don't practice, except as expert witnesses, or maybe with a board gig or two, Fox's book interestingly depicts the way that financial research and financial ventures often are twinned.  Ben Graham did value investing in the 30s and 40s, when there was a lot of value to be had - and he downed tools when he concluded that the values had been priced away.  Andrei Shleiffer and Robert Visny co-founded LSV Asset Management.  Robert Merton and Myron Scholes helped set up LTCM, Fama is associated with Dimensional Fund Advisers, and so on.  I don't think it's in the book, but Bob Shiller recently started an investment bank and took his Series 7 exam.

The list of leading legal scholars who litigate is much lower.  Fox notes the irony that all these believers in the efficient markets hypothesis essentially set themselves up to beat the market (p. 225).  I think it is also interesting to compare the relationship between the two parts of academia and their constituency in the real world.  The legal academy is completely dependent on the willingness of the legal community to enforce guild rules requiring people to go to law school.  But, as judges Harry Edwards and John Roberts have sighed, legal scholarship no longer is of much use to practitioners.

Finance looks a little different.  The ability to turn out employees for financial firms sure must help the finance departments.  And in very real ways, what said departments do is to figure out things you can or cannot trade on.  Then, some of them even go trade on it.  But the relationship is fraught.  The "real world" tends to get a chip on its shoulder when dealing with academics (less the case with law school, I think), while academics crave the respectibility of pure science, rather than the grubbiness of, as Larry Summers puts it, "making ketchup."  Fox is good on exploring that relationship, as he must, given that he is reounting the history of an idea (in scholarship), and its eventual triumph (at least in the views of academics who kept testing it against asset prices, if not actual money managers).

I don't really have a bottom line with regard to these law and finance institutional relationships, but I will say that law and finance have had a very good run in the academy since the 1980s, and I think part of that good run - growing pay, prestige, &c - is due to the fact that both have strong constituencies outside of it.  You can't say that about sociology - or even about much of the rest of contemporary economics.  

Posted by David Zaring on April 26, 2011 at 02:41 PM in Books | Permalink

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