Robert Haugen passed away in 2014, but his intellectual fire lives on in every quantitative portfolio that tilts toward low volatility, in every contrarian value fund, and in every student who refuses to accept EMH as dogma.
But then comes the hammer. He systematically lists the that EMH cannot explain: the size effect, the book-to-market effect (value vs. growth), and the January effect.
"The fundamental law of finance is not equilibrium. It is error. And the man who understands the errors of the crowd will always find the price of truth."
The world of finance and investing has witnessed significant changes over the years, with various theories and models emerging to explain market behavior and guide investment decisions. One such influential theory is Modern Investment Theory (MIT), which was introduced by Robert Haugen, a renowned economist and finance expert. In this article, we will delve into the concept of Modern Investment Theory, explore its key components, and discuss the significance of Robert Haugen's work in the field of investments.
Haugen's work is notable for balancing traditional finance theories with empirical evidence that often challenges them.
While Haugen's Modern Investment Theory offers valuable insights, it has faced criticisms and limitations:
In his research, Haugen showed that investors have a preference for "lottery ticket" stocks—securities with low prices and the potential for explosive upside. This desire for a big "win" causes investors to bid up the prices of volatile, risky stocks, thereby depressing their future returns. Conversely, stable, low-risk companies are ignored, leading to lower valuations and higher future returns. This "low-volatility anomaly" struck at the very heart of Modern Portfolio Theory, suggesting that safety was not only cheaper but more profitable.
