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Economists' Hubris - The Case of Equity Asset Management

Shojai, S.

Feiger, G

Kumar, R
In this, the fourth article in the economists’ hubris paper series we look at the contributions of academic thought to the field of asset management. We find that while the theoretical aspects of the modern portfolio theory are valuable they offer little insight into how the asset management industry actually operates, how its executives are compensated, and how their performances are measured. We find that very few, if any, portfolio managers look for the efficiency frontier in their asset allocation processes, mainly because it is almost impossible to locate in reality, and base their decisions on a combination of gut feelings and analyst recommendations. We also find that the performance evaluation methodologies used are simply unable to provide investors with the necessary tools to compare portfolio managers’ performances in any meaningful way. We suggest a novel way of evaluating manager performance which compares a manager against himself, as suggested by Lord Myners. Using the concept of inertia, an asset manager’s end of period performance is compared to the performance of his/her portfolio assuming his/her initial portfolio had been held, without transactions, during this period. We believe that this will provide clients with a more reliable performance comparison tool and might prevent unnecessary trading of portfolios. Finally, given that the performance evaluation models simply fail in practice, we suggest that accusing investors who look for raw returns when deciding who to invest their assets with is simply unfair.

The Financial Crisis as a Symbol of the Failure of Academic Finance? (A Methodological Digression)

Blommestein, H.J.
The failure of academic finance can be considered one of the symbols of the financial crisis. Two important underlying reasons why academic finance models systematically fail to account for real-world phenomena follow directly from two conventions: (a) treating economics not as a ‘true’ social science, but as a branch of applied mathematics inspired by the methodology of classical physics, and (b) using economic models as if the empirical content of economic theories is not very low. Failure to understand and appreciate the inherent weaknesses of these ‘conventions’ had fatal consequences for the use and interpretation of key academic finance concepts and models by market practitioners and policymakers. Theoretical constructs such as the efficient markets hypothesis, rational expectations, and market completeness were too often treated as intellectual dogmas instead of (parts of) falsifiable hypotheses. The situation of capture via dominant intellectual dogmas of policymakers, investors, and business managers was made worse by sins of omission - the failure of academics to communicate the limitations of their models and to warn against (potential) misuses of their research - and sins of commission – introducing (often implicitly) ideological or biased features in research programs. Hence, the deeper problem with finance concepts such as the ‘efficient markets hypothesis’ and ‘ratex theory’ is notthat they are based on assumptions that are considered as not being ‘realistic’. The real issue at stake with academic finance is not a quarrel about the validity of the assumption of rational behavior but the inherent semantical insufficiency of economic theories that implies a low empirical content, and a high degree of specification uncertainty. This perspective makes the scientific approach advocated by Friedman and others less straightforward. In addition, there is wide-spread failure to incorporate the key implications of economics as a social science. As a response to these ‘weaknesses’ and challenges, five suggested principles or guidelines for future research programs are outlined.

Reconciling Managerial and Economic Views in Competitive Advantage Research

Daniel Prior
Competitive advantage is a seemingly ubiquitous concept in business research. Its association with extraordinary firm performance results in interest from managerial audiences, as well as from economists, who hope to explain extraordinary value creation and appropriation. These two groups hold different assumptions about the relevance of competitive advantage and the desired outcomes of research in this domain. This tension underpins many of the currently unresolved issues within competitive advantage research. This paper presents a synthesis of both the managerial and economic perspectives of competitive advantage research, highlights several of the areas where both paradigms overlap and suggests some avenues for further research.

Non-executive Directors in the Profit and Non-profit Sector: A Different Approach Towards Governance?

Luckerath-Rovers, M

Quadackers, L

De Bos, A
After the recent scandals and the introduction of new corporate governance codes, non-executive directors (NED's) and supervisors have started playing an increasingly important role in providing the ‘checks and balances’ of organizations. Little is known about the way in which NED's fulfill their supervisory role. This article compares NED's in profit organizations to those in non-profit organizations. The underlying research is only exploratory. The article is a closer analysis of the results obtained from the Dutch Non-executive Directors Survey 2007 . The results show that significant differences exist between NED's in profit and non-profit organizations. The practical relevance of this study is that it aims to highlight the differences of NED's within non-profit and profit organizations. An analysis of the differences may lead to a debate within society.

Corporate Strategy Analysis: General Electric Co. (1981-2008) - A Case Study

Stanislav Bucifal
The General Electric Company (GE) is widely regarded as one of the world’s most successful corporations of the 20th century. This paper aims to analyse critically the corporate strategy of GE during the period from 1981 to 2008 under the leadership of two very different but equally influential CEOs—Jack Welch and Jeff Immelt. The paper is organised in four sections. The first section describes GE’s corporate strategy from 1981 to 2001 with Jack Welch as CEO, followed immediately by a critical analysis of Welch’s strategic approach in the second section. The third section then describes GE’s corporate strategy from 2001 to 2008 with Jeff Immelt as CEO, followed again by a critical analysis of Immelt’s strategic approach in section four.

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