Masters of Finance: Paul A. Samuelson

Video Statistics and Information

Video
Captions Word Cloud
Reddit Comments
Captions
5:30 in the morning the phone rang and my wife and the bed next to me said which child has had an accident and I listened and a Swedish accented voice said how does it feel to win the Nobel Prize and I wasn't sure that it wasn't a hoax but I said to my wife it's okay no child involved and then the announcement came that that I had been named it seemed genuine and not a not a hoax and I was surprised and I think one of my reactions was and my second daughter criticized me later when I told her about it I said well it's nice to have a lot of hard work rewarded she said that was a very stuck-up answer well the it was clear from the citation that perhaps invariant with every other laureate that despite the tradition of the prize being for a specific contribution they the the committee could clearly not avoid saying you've made specific contributions each which would be more than the Nobel Prize quality to almost every field and then of course your textbook and and they made it clear and I think everyone would would agree that you are perhaps the last truly general economist in making more Muskaan tribution to every field and then if we think of our special field line that you contributed in term of finance finance now that you may recall on a fest or if twenty years ago I I took note that all of your most significant finance papers have been produced after the age of 50 and that therefore negating the purported iron rule that scientific productivity declines with age beyond a certain point I've since noted that you've added 26 more publications since that time just in finance so I think you're continuing to provide the dish additional data along those lines but turning are you saying that when I once said in finance I'm only a Sunday painter look that isn't quite true yes that's exactly right all right we all wish we could be such Sunday pain I have my favourites of your papers your contributions but I want to ask you and can you tell us what what your favorite contributions were the ones what any number but just what are the ones that really thinking about it are the ones that you well almost every one of those papers was directed toward a prior formulated problem for example about the time you came on the scene when I wrote about what the time profile of risk-taking should be depending upon whether you were going to retire and die one year from now or retire and need income 30 years from now I wrote the paper to work out what was rational because without argument everybody assumed that as you got older you should be more conservative in your in in your equity tolerance now they they seem to believe because all of the Economist's that had a smattering of classical statistics that with the large numbers comes greater security lower variability and so if you have 35 years to retire you're going to have samples of 30 quasi-independent items and therefore risk erodes as the horizon number ahead grows well there's an obvious exception to that by that time we all knew about constant relative risk aversion where when you will use that utility model for your postulated laplacian rational investor you do the same thing when you have one year to go if you're facing truly white noise and as you would do if you had a hundred thousand years to go that it's not the statistical law of large numbers that's involved that makes some sense of the customary dogma but it is the fact that you have the option of working harder or working less hard if you're optimistic guests goes goes wrong and so in that model when you add the variability of your supply effort over your lifecycle there is some some truth to it every one of the problems I wrote about was in the air your father would have understood that the double Tain's triple Tain's I've never been a believer in the single great man theory of either heroic generals Napoleon's or heroic Einsteins and Newton's were all different but the scientific quasi self-correcting process is a group process but if you ask which is my favorite in that area it's the paper that I wrote for the retirement session of Jim Jim Tobin at Yale Jim Tobin was a beloved friend and really my role model I tried to be as righteous as he was and as judicious as he was and so there I read the usual assumption in a in finance that you have a random walk by the way I've never believed in the random world the true random walk when I proved that that anticipated prices will fluctuate randomly it was not that if you wait long enough this P that I have in my hand will sell for as much as that Cadillac that you're driving that's what happens with a really random walk to go into the substantive result was I took the simplest process I could imagine of what I call red noise white noise is truly random walk that the future is independent of the past so knowing what the stock rose yesterday has no influence on the probability distribution of what it will do percentage-wise between today and tomorrow that's that's white noise red noise I called regression towards the mean where there's a negative serial correlation through time so that if things go up a lot yesterday to today you should bet that they won't go up as much as they would normally do between today and tomorrow that's red noise blue noise is the opposite still where if things went up yesterday they will go up in a probability sense more often tomorrow the baseball announcer has it Ezard of course conveniently all wrong Ted Williams is due to hit because he hasn't yet for seven days that's red noise Ted Williams is hot he's sure to hit tomorrow because he's hit for seven days that's blue noise well the vulgar description of an efficient market with random movements which is white noise is in between I seem to recall that you did some investigation earlier on with putting coal dealers yes in those days the state of Illinois regarded options as illegitimate gambling so the Wall Street Journal of Chicago we had no option prices the only option prices were in the New York edition and the button called dealers which a little trade association were mostly European refugees in dingy offices outside of the high rent areas there so I would go there and ask my innocent questions typical question mr. Godkin is it true that if I buy a put because I think a stock is going to go down and I'm correct in my inference and the stock does go down and I make a profit on my put that that profit which came from the drop in a stock can be treated as a long-term capital gain if I've held that position for over six months or over one year he said absolutely I said well you know if I sell short that's not true he said I know that but this is different and I said are you sure he said absolutely I said are you telling me that if I wrote a letter to the IRS and asked for a private letter confirming that that's the case he said why would you want to do that okay that's just one tale but talking to still another one of those guys he said I don't understand why are you here what are you up to I said I'm trying to study the science of option pricing he said that's hopeless you'll never succeed nice and why not he said it takes a European kind of mind to understand this industry so in revenge I gave the name European option to the simpler option but you know the review that I wrote of beat the market by Thorpe and cacif is not in the collected papers I don't know what I should blame you was that vigilante is that volume 3 no I blamed myself map maybe I thought it was too ephemeral actually it's got a lot of Verve and in a certain sense writing that paper may have kept me from discovering the black-scholes formula the light motif of my review was there is no such thing as a perfect hedge and this purple prose of the book was it's very easy to make money just on mergers and stuff do this and that and it's money for Jam what's never money for jammy there's always an eventualities that has relevance where you could lose money it certainly doesn't escape anyone looking at your 1965 warrant paper yeah that the black Scholes formula on your formula are exactly the same formula except your alpha is equal your the beta equal to the interest rate well by the way I published in recent years a paper with co-authors that clears up an open problem that I couldn't solve in the first paper I ever wrote a problem isn't something that you have in the past it's like a child or a perpetual care grave you've got it with you all the time I guess I was you've mentioned again about the the importance of understanding practice but because finances had the great good fortune that finance science has really had a subsequently huge impact on practice I know what helped induce what a market to be viable has to build up volume tack straddling kept started the currency market if there hadn't been that I think it would have been a much slower process of accumulating the necessary critical mass because these are not constant returns to scale processes the markets themselves they're increasing returns processes it was a Shibboleth that no new market will ever fail but when they tried to have a market where you insured against changes in macro variables in all in spades you couldn't get two sides it takes two to tango what do you think going forward I mean you've been well I'll tell you however I have questions the the whole existence of these elaborate derivatives is a marvelous opportunity to spread risks and share risks and so forth in fact it's also a marvelous temptation to take on risk if two to one leverages what you get by following the letter of the law on margin borrowing getting a good financial engineer to help you you can achieve leverages of not two to one but of ten to one maybe a fifty to one and most people in the industry don't know really what their risks are it certainly would we'll take lots of difficult monitoring to be sure that we end up with a more stable situation rather than in times of crises of worth less less stable also I should say that in my own investing which I never discuss with anybody in which is very unimportant part of my life and involves very little application of energy and time but by me I have not been able to find a remarkable congruence between I make money or Society benefits and I lose money on things where society is going to be hurt on the contrary if you take well it let's say the new Warren Buffett or Warren Buffett Munger methodology you buy a good company with a franchise apparently anybody can recognize what's a good company with with with franchise when I sat at Schumpeter's knee at Harvard I learned there are no franchises under capitalist you the top rooms in the capitalism's hotel are always filled with they're filled with different different people this is a quasi belief that there is such a thing as a permanent oligopoly which has an edge to coin coin money if it just keeps his nose clean well I don't think that that that is so but to take a different case it's good to get the incentives of the decision makers in the corporation in alignment with the interests of the corporate stockholders now it could be that by a Darwinian freak the new generation of CEOs are 10 times as smart ten times as conscientious work ten times as hard for the interests as shareholders but I beg to doubt that my definition of good trader is somebody who over a long period of time controls downside and it comes up with upside I suppose I am known few hundred people and I would say with little time out I might come up with ten names of people who might consider to be pretty good pretty good traders but there's no relationship between what their gains are and what their contribution to the increasing total factor productivity of the society later they live in they are people who are little quicker than there are others in and and that quickness is where the the money comes in they also are a little bit shrewd now there may be one or two people who have hidden methods which by definition I will never know about who coined money repeatedly it's not a simple thing that less a fair necessarily creates for the good society the most optimal thing I believe I'm centrist how many practices I believe that with reasonable regulation not zero regulation the performance of a mixed economy can beat that of any planned dictatorial utopia or of any less a fair I grew up for 15 first 15 years my life yeah in essentially pure capitalistic very few unions and no odorous federal or state led legislations and there was a nightclub singer Sophie Tucker she interact she would say I've been rich I've been poor believe me rich is better well I I was in the pre Keynesian pre pre mixed society and in the mix believe me the mix society is better however and here I blame no politicians I blame us the electorate the father we get away from the Great Depression the farther we get away from quote the good necessary War World War two which was run in a very efficient fashion by the US government in comparison with say the either the Russian or the German collectivist governments altruism seems to be eroding away and there's much more of the libertarian me-me-me-me philosophy it shows itself of course in saving over consuming patterns and and so forth so but you can't dissolve the electric and get a new electorate the paradox to me is that I get in my position of modest I affluence hand out after hand out in the new order that we're in and the people who we may be work for me in a nurse who helps helps me if I need a nurse gardener and so forth they're the ones who vote for the people who are giving me the handout now it's not as if we're getting them a more efficient mixed capitalism it's and the distinct possibility that a state taxation will be a rotor way to zero I think is not a sociologically a good thing for the future society but I've only got one nose in one boat I subscribed to the freed rhl service he would give you a list of hot items and one of my colleagues dick Equis would borrow this this survey from me and he said to me one day why do you take that survey it's almost always wrong and I said well cost me 150 dollars a year but if I get one good idea from it that's very worthwhile I thought about it for 24 hours when I saw him the next time I said I want to amend what I said when you get one good idea net because it's those it's those recommendations that I've had from optimistic brokers I've got a new IBM for you by the way in the old days an IBM was considered something we couldn't go job and could only go up those new IBM's recommended to you that's the way you really lose money what would you say today to the investor to the household I mean you know the person in the street I mean because there's so much back and forth well what would you have any guideline prescriptions well for most people diversification low turnover in your in your portfolio you don't have very many home runs that way but gee you don't have lots of strikeouts I've been at MIT for well 60 years and in the course of that time number of colleagues have died and left a spouse usually if the widow and so perforce to my door have come a few widows over years asking my wise advice it's not business I like like they have but they say where can I get disinterested accurate advice and I'm actually almost at a loss ever to ever to say I could tell them what the simple what a simple defensible strategy would be S&P 500 have more index funds outside of the core of the S&P 500 have a European share and and so forth but if it's it's very hard to get advice and I I know that people who don't have the simple knowledge and beliefs that are quasi optimal they have to pay for it if you haven't got a friend who will talk you out of your depression you've got to pay a psychoanalyst and a pharmacist to to do it but it's say in a in a lucky country like America it's it's really hard for things economically to go seriously wrong if you'll permit me I just it reminded me when I was here is your research assistant and you're fond of a story you tell about I guess it was Dickinson the mathematician in Chicago yeah as I recall the story and I know you're correct now it was that he used to play a bridge in the afternoon after quadrangles club with a quadrangles club and colleague said North student said and said Professor Dixon how can you waste your time playing bridge every afternoon at the quadrangles Club and he said well young man if you thought as intensely and carefully between 8 and 12 as I do you could bridge so but much the story of hard work well earned play antennas now antennas antennas of course for you but you see you too have done that and when I was here as a user research system we were working on a problem in warrant pricing and you took off as you often did in the afternoon to go play tennis and I thought that perfectly appropriate I kept chair working but I may remind you that as I was struggling away on one of those partial differential equations I got a phone call from you and you had come off the court I guess between sets to say you have thought about it and here's the way that you ought to do solution so I just thought about that sitting here and I said well you're too like Dickinson and much the same story for Hardy with cricket you know you work very hard your well-earned play except you do it with your own twist it appears that when you were player at work right now did I not play with your brother-in-law yes you did I thought I he tells that story of this day right yeah well it's been a good life I've always been a overpaid under work because my work isn't work you
Info
Channel: afajof
Views: 51,096
Rating: 4.9040766 out of 5
Keywords: American Finance Association, AFA, American, Finance, Association, Journal of Finance, Journal
Id: RbIzwTGN3Yc
Channel Id: undefined
Length: 29min 13sec (1753 seconds)
Published: Mon Sep 02 2013
Related Videos
Note
Please note that this website is currently a work in progress! Lots of interesting data and statistics to come.