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transcript14 - Financial Markets: Lecture 14 Transcript...

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Financial Markets: Lecture 14 Transcript March 5, 2008 << back Professor Robert Shiller: [We have today our guest lecturer, Andrew Redleaf. I won't spend more time introducing--he's head of Whitebox Advisors, a hedge fund, we've talked about him in class and I'll turn it now over to Andrew,] manager of a hedge fund, Whitebox Advisors, and a Yale graduate. I won't spend any more time on introduction, but I want to say that we'll allow some time at the end for questions. Unfortunately, we had to cancel our lunch today, but we'll have time at the end of this talk to--for questions. Mr. Andrew Redleaf: Okay, is this an hour or an hour and fifteen? I hated hour and fifteen-minute classes I always tried to do the three-day a week, fifty-minute ones because that was--even that strained my attention span. I think--the, sort of, first thing that I think most people think about or the first question when you're thinking about financial markets is whether they're efficient or not--whether they incorporate all known information--if it's possible to do, sort of, significantly better than the market as a whole. I'm not sure--used to be absolutely received economic wisdom that financial markets were efficient. Now it's--I think it's still the dominant academic view, but there's a big debate and there are partisans on both sides. It's actually--to me, it's actually a fairly simple question. The efficient--the notion that markets are efficient derives from an a priori theory, which is the same sort of theory about all markets. There are lots of incentives, people acting in their own interests--they have to do that. It's a very appealing kind of a priori theory, but the thing about theories is they're supposed to make predictions. If some of the things they predict don't come true, the theory has to be disregarded and there are many, many, many counter examples to financial market efficiencies. On one level, there are things like companies that have two different classes of stock that are economically identical. Royal Shell used to have Dutch shares that traded in Holland and U.K. shares traded in London. Economically identical, but their prices would fluctuate and fairly dramatically. In '98, I forget which way, but one of the share classes was at a 20% discount to the other and that persisted for several years, so you have economically identical things trading at different prices. You have closed end funds, which are vehicles that own a set of other securities--trade as a security listed on the stock exchange, but what they do is own other securities. And whether they trade to a discount--whether the security in the closed end fund trades at a discount or a premium to the stuff they own--fluctuates meaningfully in a way that's sort of difficult to recognize with the idea that the securities should be reflecting economic value. You have what are called stubs, where one public company owns a significant stake in another public company. In instances where the one--3Com owned Palm, and the value of its Palm stake
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transcript14 - Financial Markets: Lecture 14 Transcript...

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