Academic Research is Bad for Your Financial Portfolio (The Chronicle of Higher Education)

The Chronicle of Higher Education points out the irony that while academia is sometimes criticized for being irrelevant to daily life, new research suggests that academic papers can have a direct impact on your wealth.

Two finance professors at MIT and Boston College — David McLean and Jeffrey Pontiff — argue in a new paper that if scholars analyze certain investment strategies, the returns of the stocks included in the strategy will shrink by one-third over the next decade. The theory is that investors read the scholarly articles and adopt the strategies, driving up the demand and raising the prices for the stocks, thereby cutting future profits for buyers.

“Once you draw attention to a strategy, then it stops working as well,” explains McLean, who is a visiting associate professor of finance at MIT’s Sloan School of Management. The Chronicle concludes, “Essentially, academics are helping the markets work, drawing attention to stocks that are overpriced or underpriced. Then the market, in a way that will please traditional economists, moves to correct those values.”

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