Prof. Robert C. Merton: ICAPM, Retirement, and Models in Finance | Rational Reminder 234
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- čas přidán 4. 07. 2024
- Few people have impacted the way the world works, and today, we have the privilege of speaking to one of them. Professor Robert C. Merton is the Distinguished Professor of Finance at The Massachusetts Institute of Technology (MIT) Sloan School of Management and Professor Emeritus at Harvard University. He has a Ph.D. in Economics from MIT and is currently the Resident Scientist at Dimensional Fund Advisors. Professor Merton was awarded the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for his work establishing a new method to determine the value of derivatives. He also created the Intertemporal Capital Asset Pricing Model (ICAPM), a popular tool to help advisors make informed financial decisions and understand market trends. In our incredible conversation, we cover portfolio theory, moving from Capital Asset Pricing Model (CAPM) to the Intertemporal Capital Asset Pricing Model (ICAPM), and how financial models work. We also discuss the difference between the value of your capital and the value of the cash flow that can come from that capital, why size can't be a factor, what aspects to consider when calculating the worth of an account, and the definition of market efficiency. We also delve into retirement, how to safely invest for it, what pitfalls to avoid, and how retirement funds may change over time. He also shares his opinion about some popular financial advise and what the roles of financial advisors should be. For all this and more, tune in to hear from the man behind the model and Nobel laureate, Professor Robert C. Merton!
Timestamps:
0:00 Intro
4:45 The Basics of ICAPM asset pricing model explained
11:35 How portfolio theory changes when moving from single-period to multi-period
15:33 Practical example of expected returns changing over time
24:17 ICAPM & an investor’s risk
36:50 The time horizon’s influence on risk-free assets and your stocks & bonds mix
46:23 His opinion on using leverage to make investments
1:03:02 Discussion on retirement (difficulties, tips, etc.)
1:29:25 Overview of the impact mathematical models have had on the finance sector
1:44:16 What popular financial advice does Prof. Merton believe to be misguided?
1:46:25 Ways his work on option pricing has impacted society
1:58:39 The role he see’s for financial advisors
2:06:11 Prof. Merton unpacks the definition of product design
2:12:21 Extended discussion
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This one is really something else. I don't know how else to describe it. Your other guests kind of echo each other in many ways (which is fine) but this guy is his own solar system.
Wow.. Relatively new to this podcast. To put it simply never learned so much about finance and economics in a single day! I thought I knew a lot, but this gives a whole new perspective!
This bloke is awesome. Never learned so much and gained brand new perspective in one interview…ever
He throws this little gold nugget right at the end, valuing growth stocks as options, not by discount rate. Food for thought.
Such a great man and so humble he thought he's apologizing for taking your time amazing.
Very happy to find this channel - esp being 2 years from retirement and heading into 2023 🙂
Wow. Speechless. I don't know how you manage to get guests like that, but keep up the good work.
I would really like to have each and every one of your guests sharing his own asset allocation if possible.
The main lesson: in a world where a lot of people waste lots of time having nothing to say,, Prof. Merton still apologizes for taking too much "tape".
Never heard Merton talk, but his insights are great. ICAPM sounds very complicated to use in practice. I tend to learn best from examples - like how should a 30 year old nurse invest her money to provide for her standard of living in retirement? Her human capital is bond like and stable, has a long time horizon, resilient to inflation as her human capital is a real asset vs. how should a near retiree with 1mm invest to provide for 50k/yr inflation adjusted income - little human capital, huge inflation risk, big sequence risk, huge risk to prevailing interest rates. Would've been helpful to have some building blocks for what assets to hold to best minimize the unique risks they face at each stage of their lives.
I loved the discussion about framing retirement in terms of income. So often retirement is "do the best you can till you turn 65" or "I need X amount at X age". I like looking at it as "I can retire when my portfolio can sustain my lifestyle". Obviously there are caveats, but it's a much better framing device.
I was listening to that and wondering if it's really possible or right to simplify it like that. Because then you'll have people assuming it's the same as pension and thinking of it as guaranteed, which it won't be.
@@krdxz he didn't say this but I think the point is that most people should just periodically annuitize financial assets during retirement as their income need rises.
And seeing the income your 401k can generate when annuitized in the future is a much better gauge of retirement readiness.
@@gmh953 The original poster liked the whole idea of changing way of thinking from wealth to income, which is appealing to many people, I agree. What I'm saying thought is those "caveats" mentioned will cost you, there are always associated costs when inserting a middle man between investor and his/her money.
Prof. Merton is a true Boss
Prof Merton made a comment near the end, "what's the underlying explanation for value and so forth. That would be for another day."
I think this would be a great podcast. What is the underlying explanation for small cap, value factors, etc? I still don't get it.
This is 3rd time I listened to this episode, still learned a lot. Will keep come back listen to it, I am sure. Professor Merton is truly amazing, and so clear minded.
Einstein famously said that everything should be made as simple as possible, but no simpler. You guys seem to have struck this delicate balance in the tricky world of investment.
The sequel to Ep 200? Hahaha. Great work guys!
Thank you!
I am attracted to idea of stabilizing the volatility of the portfolio instead of rebalancing for say, 60/40 to stabilize risk...but stabilizing the volatility sounds elusive to me. What is the approach to stabilizing the volatility?
Great discussion.
I hope you've asked about the new Brazilian Treasury bond Prof Merton helpe do to conceive. The bond has a "inflation+rate" yield and is expected to pay 240 monthly payments after maturity (8 options from 2040 to 2065). At today's market, the yeild is abot inflation +6 in BRL. The cost is zero if held to maturity.
Lol “selling your human capital is illegal” yeah Abraham Lincoln got rid of that in the States.
Also Merton seems like such a thoughtful and humble guy
What a cool ass boss!
Nice But I guess LCTM would also have provided a good experience and lessons learned. Understand that topic was to be avoided, would have found it interesting though. Maybe for another platform.
Actually it was Modigliani who worked on life cycle. Friedman was permanent income vs transitory.
Benjamin Franklin put his money in a savings account and told the bank not to take it out for 200 years after he died. They cashed it out 200 years later for 7 million dollars
😎👌🏻
This must be humbling. So no monte carlo anymore?
😂 nice
Theory that can't be put into practice. Saying everyone should not use shares/retirement investments because they are risky and use risk-free annuities instead that don't exist... even if there was I doubt it'll be a great return. Could increase social security for all by increasing taxes and hope population growth can cover it in perpetuity, not risk free.
2:22
3:20 size cant be a risk.
Nice gentleman but I very much disagree with his stance on education. Some time ago we were discussing how the lack of financial knowledge/literacy led to retirement income gap, and after watching this video, I can totally see how some people have been handicapped by advisors.
Esoteric knowledge is power money wrapped up by the elite mummy tombs.
The issue is people who don't want to get educated, and resent attempts to educate them for whatever emotional reason. That comprises most people, particularly the elderly. You have to meet those people where they're at, that will at least enable them to make better, if still sub-optimal decisions.
LTCM
...
10:00
11:42
27:45
31:28
34:50
36:55
Definetly not a man of few words
Basically, dividends are the only thing that matters. That's what he said.
😆🤣🤣🤣