Michael C. Jensen

And that's to be expected.

There's often this big criticism where people say, why do fund managers on average underperform the market and they sort of have to right because if if you add up all of the fund managers out there like every fund out there then you've got the market right because they'll all be overall the if you add up all their long exposures they'll be the exposure of the market and then they are going to underperform because you've got all of them and so best case scenario you'd get the average performance of the market but of course they're all charging a fee so they're all on average going to underperform by the amount of the fee and so that's the argument for indexing or for finding the lowest fee product possible because that's a way of possibly getting better performance than in an average mutual fund So alpha, the calculation of alpha was first used as a measure to evaluate mutual fund managers by Michael Jensen in 1968.

So it's often also referred to as Jensen's alpha.

And as I said, it represents the abnormal return of a security over the theoretical expected return.

And we've got a calculation down here where alpha equals portfolio return minus risk free rate plus portfolio beta times market return minus risk free rate.

The intercept becomes what it actually makes.

The difference between those two numbers is called Jensen's alpha.

You say, who's Jensen and why do you call it an alpha? The alpha part is easy.

When you run a regression in statistics, the intercept is usually called the alpha.

So it called it alpha for that reason.

It's called Jensen's alpha because it was created by a guy called Mike Jensen.

in the 1960s, the University of Chicago, which is where the finance got its start in the University of Chicago.

And he created it for a very specific purpose.

Mm.

It was an interview by Karen Christensen, uh, of Michael C. Jensen, who this was kind of Mike's last thing.

He's passed on now.

He and Werner were really working on, and I believe Werner...

Any questions on currencies? Let's talk about corporate governance.

As I said, this focus on corporate governance in finance started with a paper written by Michael Jensen and William Meckling.

This was 1974.

But for the first time, they said, what managers do is not always in the best interest.

Um, also, you know, by-when dates, uh, you know.

Uh, anyway, I'm g- I'm, I'm getting off of it, but the business part of this is phenomenal, and there's a paper written by a, a Harvard professor named Michael Jensen called, um, Integrity Without...

Um, he, um, he teaches a whole course on integrity.

Without it, there's nothing.

from from I guess more conventional or traditional ways of thinking about investing the typical understanding for most is that you know investing requires someone's ability to pick investments to time when to buy and when to sell to do that is is a great skill of intellect absolutely information advantage and and to be able to outguess effectively the market.

And despite the fact that Michael Jensen in the 1970s proved that active professional money managers systematically failed time and time again, that conventional wisdom and viewpoint has maintained relevance for many people for many years.

Evidence-based investing provides an alternative that's based on a sound foundation of theory with a lot of evidence to show that it's real and it's applicable.

And we think that that's a preferable way for many people to invest money.

Principal-agent problem is an old idea in economics.

Two economists, Michael Jensen and William Mechlin, gave it its famous formal treatment back in 1976.

The basic setup is simple.

A principal hires an agent to act on their behalf.