My excellent Conversation with John Cochrane

Here is the audio, transcript, and video.  So many good parts it is hard to excerpt, here is part of the summary:

John joined Tyler to apply that habit of mind to a number of puzzles, including why real interest rates don’t equalize across countries, what explains why high trading volumes and active management persist in finance, how the pandemic has affected his opinion of habit formation theories, his fiscal theory of price level and inflation, the danger of a US sovereign debt crisis, why he thinks Bitcoin will eventually die, his idea for health-status insurance, becoming a national gliding champion, how a Renaissance historian for a father and a book translator for a mother shaped him intellectually, what’s causing the leftward drift in economics, the need to increase competition among universities, how he became libertarian, the benefits of blogging, and more.

Here is one bit from John:

COCHRANE: You ask two questions here. One is active management, and the other is trading. I’d like to distinguish them. It’s a puzzle in the Chicago free market sense.

Let me ask your question even more pointedly. If you believe in efficient markets, and you believe in competition, and things work out right, we’ve scientifically proven since the 1960s, that high-fee active managers don’t earn any more than a proverbial monkey throwing darts in a well-managed slow index. So why do people keep paying for high-fee active management?

Chicago free market — we’re not supposed to say, “Oh, people are dumb for 40 years — 50 years now,” [laughs] but there’s a lot of it. It’s one of those things. Active management is slowly falling away. The move towards passive index investment is getting stronger and stronger.

There’s a strong new literature, which I’ll point to. My colleague here, Jonathan Berk, has written some good articles on it. This is the puzzle of efficient markets. If everybody indexed, markets couldn’t be efficient because no one’s out there getting the information that makes markets efficient. Markets have to be a little inefficient, and somebody has to do the trading.

Your second question is about trading. Why is there this immense volume of trading? When was the last time you bought or sold a stock? You don’t do it every 20 milliseconds, do you? [laughs]

I’ll highlight this. If I get my list of the 10 great unsolved puzzles that I hope our grandchildren will have figured out, why does getting the information into asset prices require that the stock be turned over a hundred times? That’s clearly what’s going on. There’s this vast amount of trading, which is based on information or opinion and so forth. I hate to discount it at all just as human folly, but that’s clearly what’s going on, but we don’t have a good model.

Self-recommending.

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