The Rational Reminder Podcast | Prof. John Y. Campbell: Financial Decisions for Long-term Investors | Rational Reminder 250 @rationalreminder | Uploaded April 2023 | Updated October 2024, 12 hours ago.
**Due to minor technical issues with the Zoom call between Ben, Cameron and Professor Campbell, there are portions of audio that were not picked up throughout the interview.**
Navigating the world of finance and investing is undeniably complicated, sometimes unnecessarily so. And all too often the people who end up making the most costly financial mistakes are those who can least afford to do so. But what exactly needs to change in order for more people to make wise and well-informed financial decisions? And how do we go about implementing those changes? Joining us today to help us unpack this topic and the many decisions involved in the world of investing is John Y. Campbell, a British-American economist, professor of economics at Harvard, and founding partner at Arrow Street Capital, a systematic asset management firm based in Boston. John has published hundreds of articles on a range of topics including fixed income, equality valuation, portfolio choices, and household finance, all of which we explore in today’s expansive conversation. We kick things off by discussing utility theory, why it’s so important to the study of finance, and what it can teach us about risk aversion, before delving into portfolio structure, asset allocation, and hedging. John also expands on the study of household finance, the mistakes that households typically make, why household behaviour tends to differ from theoretical predictions, and how to bring theory and behaviour into alignment. We wrap things up by discussing how financial literacy, education, and regulation can improve outcomes for households before hearing John’s advice on selecting an optimal mortgage contract along with an overview of the type of risk that mortgage contracts expose you to. Today’s episode is jam-packed with information and insights from a profoundly knowledgeable figure in academia.
Timestamps:
0:00 Intro
3:33 What asset pricing theory aims to accomplish
8:24 How John estimates how risk averse an investor is
11:01 How utility and risk aversion are applied to portfolio choice over a single time period
16:33 The implications of CAPM pricing for portfolio choice
24:00 How asset pricing changes when moving from a single-period to multiple periods 28:51 How return predictability changes portfolio advice for long-term investors
34:40 The risk-free asset for a long-term investor
40:14 What drives the covariance between stock and bond returns
43:10: Impact of labor income on optimal portfolio choice
47:03 How intertemporal asset pricing explains the differences in returns of value and growth stocks
53:08 What drives the booms and busts seen in value stocks
1:01:14 How long-term equity investors should approach foreign currency hedging in their portfolios
1:06:17 The questions the study of household finance aim to answer
1:13:39 Mistakes that households make
1:22:08 Whether financial literacy education or regulation has the most potential to improve outcomes for households
1:30:40 The different types of risk that mortgage contracts expose people to
1:33:45 John defines success in his life
Participate in our Community Discussion about this Episode:
community.rationalreminder.ca/t/episode-250-prof-john-y-campbell-financial-decisions-for-long-term-investors-discussion-thread/23202
Links From Today’s Episode:
Rational Reminder on iTunes — itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — rationalreminder.ca
Shop Merch — shop.rationalreminder.ca
Join the Community — community.rationalreminder.ca
Follow us on Twitter — twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — twitter.com/benjaminwfelix
Cameron on Twitter — twitter.com/CameronPassmore
John Y. Campbell — https://scholar.harvard.edu/campbell/home
Extra references can be found at: rationalreminder.ca/podcast/250
**Due to minor technical issues with the Zoom call between Ben, Cameron and Professor Campbell, there are portions of audio that were not picked up throughout the interview.**
Navigating the world of finance and investing is undeniably complicated, sometimes unnecessarily so. And all too often the people who end up making the most costly financial mistakes are those who can least afford to do so. But what exactly needs to change in order for more people to make wise and well-informed financial decisions? And how do we go about implementing those changes? Joining us today to help us unpack this topic and the many decisions involved in the world of investing is John Y. Campbell, a British-American economist, professor of economics at Harvard, and founding partner at Arrow Street Capital, a systematic asset management firm based in Boston. John has published hundreds of articles on a range of topics including fixed income, equality valuation, portfolio choices, and household finance, all of which we explore in today’s expansive conversation. We kick things off by discussing utility theory, why it’s so important to the study of finance, and what it can teach us about risk aversion, before delving into portfolio structure, asset allocation, and hedging. John also expands on the study of household finance, the mistakes that households typically make, why household behaviour tends to differ from theoretical predictions, and how to bring theory and behaviour into alignment. We wrap things up by discussing how financial literacy, education, and regulation can improve outcomes for households before hearing John’s advice on selecting an optimal mortgage contract along with an overview of the type of risk that mortgage contracts expose you to. Today’s episode is jam-packed with information and insights from a profoundly knowledgeable figure in academia.
Timestamps:
0:00 Intro
3:33 What asset pricing theory aims to accomplish
8:24 How John estimates how risk averse an investor is
11:01 How utility and risk aversion are applied to portfolio choice over a single time period
16:33 The implications of CAPM pricing for portfolio choice
24:00 How asset pricing changes when moving from a single-period to multiple periods 28:51 How return predictability changes portfolio advice for long-term investors
34:40 The risk-free asset for a long-term investor
40:14 What drives the covariance between stock and bond returns
43:10: Impact of labor income on optimal portfolio choice
47:03 How intertemporal asset pricing explains the differences in returns of value and growth stocks
53:08 What drives the booms and busts seen in value stocks
1:01:14 How long-term equity investors should approach foreign currency hedging in their portfolios
1:06:17 The questions the study of household finance aim to answer
1:13:39 Mistakes that households make
1:22:08 Whether financial literacy education or regulation has the most potential to improve outcomes for households
1:30:40 The different types of risk that mortgage contracts expose people to
1:33:45 John defines success in his life
Participate in our Community Discussion about this Episode:
community.rationalreminder.ca/t/episode-250-prof-john-y-campbell-financial-decisions-for-long-term-investors-discussion-thread/23202
Links From Today’s Episode:
Rational Reminder on iTunes — itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — rationalreminder.ca
Shop Merch — shop.rationalreminder.ca
Join the Community — community.rationalreminder.ca
Follow us on Twitter — twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — twitter.com/benjaminwfelix
Cameron on Twitter — twitter.com/CameronPassmore
John Y. Campbell — https://scholar.harvard.edu/campbell/home
Extra references can be found at: rationalreminder.ca/podcast/250
