Strategic Asset Allocation:
Portfolio Choice for Long-Term Investors
Invited address to the American Economic Association
and American Finance Association
Atlanta, Georgia, January 4, 2002
John Y. Campbell
Harvard University and Arrowstreet Capital, LP
It’s a great honor to be asked to give this lunch talk, and particularly to be introduced by
I well remember when I first read a paper of Bob’s – I was sitting in the
New Haven train station during my third year as a Yale PhD student.
Bob’s paper on
stock market volatility was so absorbing that I lost consciousness of my rather grimy
surroundings and had to run frantically to catch my train.
I remember thinking that this
was the kind of work I would like to be able to do.
By great good fortune, Bob later
came to Yale and became my thesis adviser, coauthor, and the inspiration for much of my
I’d like to talk today about my recent work on strategic asset allocation, the theory of
portfolio choice for long-term investors.
My book on this subject, written with Luis
Viceira, has just been published by Oxford University Press who, I’m glad to see, are
aggressively advertising it at this meeting.
In the book, Viceira and I make specific assumptions about investors’ preferences and the
financial market conditions they face.
We solve for optimal portfolios under these
assumptions, and present these portfolios as investment advice for long-term investors.
We do not assume that investors have already chosen optimal portfolios, and thus we do
not test our models by comparing our recommended portfolios with actual portfolios.
The book is an exercise in normative economics rather than positive economics.
Normative economics has a somewhat precarious status in our profession.
economists prefer to assume that individuals are already optimizing correctly, and that
our job is merely to describe their choices.
My colleague Robert Barro expressed this
view with characteristic sharpness when he told me that “normative economics is what
you call your model when it fails to fit the data”.
On the other hand, there has always been a desire among economists to use our discipline
to improve the world.
This is only possible if some agents in the economy – private
individuals, government bureaucrats, or politicians – are not already optimizing correctly.
Keynes vividly expressed our desire to be useful in his essay “Economic Possibilities for
He wrote: “If economists could manage to get themselves thought
of as humble, competent people, on a level with dentists, that would be splendid!”