Prof. John Y. Campbell: Financial Decisions for Long-term Investors (EP.250)

<p class="p1">Navigating the world of finance and investing is undeniably complicated, sometimes unnecessarily so. And all too often the people who end up making the most costly financial mistakes are those who can least afford to do so. But what exactly needs to change in order for more people to make wise and well-informed financial decisions? And how do we go about implementing those changes? Joining us today to help us unpack this topic and the many decisions involved in the world of investing is John Y. Campbell, a British-American economist, professor of economics at Harvard, and founding partner at Arrowstreet Capital, a systematic asset management firm based in Boston. John has published over a hundred of articles on a range of topics including fixed income, equality valuation, portfolio choices, and household finance, all of which we explore in today’s expansive conversation. We kick things off by discussing utility theory, why it’s so important to the study of finance, and what it can teach us about risk aversion, before delving into portfolio structure, asset allocation, and hedging. John also expands on the study of household finance, the mistakes that households typically make, why household behaviour tends to differ from theoretical predictions, and how to bring theory and behaviour into alignment. We wrap things up by discussing how financial literacy, education, and regulation can improve outcomes for households before hearing John’s advice on selecting an optimal mortgage contract along with an overview of the type of risk that mortgage contracts expose you to. Today’s episode is jam-packed with information and insights from a profoundly knowledgeable figure in academia.</p> <p class="p1"> </p> <p class="p1"><strong>Key Points From This Episode:</strong></p> <p class="p1"> </p> <p class="p1">•    An overview of asset pricing theory; unpacking the utility function in finance, what it teaches us about being risk averse, and how it is used to determine the value we place on any amount of money. <str