transcript13 - Financial Markets: Lecture 13 Transcript...

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Financial Markets: Lecture 13 Transcript March 3, 2008 << back Professor Robert Shiller: Before I begin, I want to say something about our speaker on Wednesday, Andrew Redleaf. First of all, he accepted our invitation to go to lunch with some of you. So, I want to arrange an event, actually at one of the college's cafeteria. I haven't figured out--maybe one of you has a suggestion, especially if we can get a--see what college he was here--we did it in his college because he graduated from Yale. I've forgotten which one that was. It had a nice room upstairs, so maybe I'll try to get that one again. Of course, he said he doesn't particularly care--maybe I should take him to another one. Yeah, if you can suggest a college, which has a nice room and that will be both--I'll come and Redleaf will come; so, that's this Wednesday. What I'm going to do is email you the details. If you could email me if you're interested in coming, so we can have a good size group and a discussion. I just want to say a little bit about Redleaf. He founded Whitebox Advisors in 2000--so that's eight years ago--and it is now up to $1.8 billion assets under management. "Assets under management" is how much money he has drawn in from investors. So, he's doing quite well and he has some celebrity status among hedge fund managers. Notably, I put on the website for March 5 th , under our class syllabus, a New York Times article about him entitled, "Curiosity Has Its Merits." I guess it struck the author of that article that Redleaf is just a guy who was very curious about a lot of things. He wants to know how things work and why things are happening. That might be a natural impulse and some people have that more than others. It's probably a good impulse to have if you're going into investment. Of course, he turns it into productive purpose, so there are a couple examples from that article. One is that--there's a literature in finance about options and stock price performance, which goes back ten years, that shows that something is not quite right with the way companies issue options. Let me remind you what happens. What's happening, increasingly, is that employees or top executive employees, at least, in companies are rewarded as part of their compensation with options on the value of the stock of the company they work for. You work for XYZ Corporation; the share is trading at $10 a share; they would give you "at the money" or "out of the money" options--say options to buy the stock at $11 a share. That's $1 more than it costs now in the market, so the options are worthless unless the price of the stock goes up. So, that's supposed to incentivize you as a manager to get the stock price up. Then you make money if the price of the stock rises above, in that case, $11 a share. All that is fine, it sounds good that managers should be given options because it will incentivize them to work for the benefit of the corporation. The problem that's been revealed in finance literature is that there's an uncanny tendency for the stock price
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This note was uploaded on 03/17/2012 for the course ECON 252 taught by Professor Robertshiller during the Spring '08 term at Yale.

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transcript13 - Financial Markets: Lecture 13 Transcript...

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