Hidden Forces Index Funds, ETFs, & the Passive Investing Revolution | Robin Wigglesworth
Oct 25, 2021
Robin Wigglesworth, a Financial Times global finance correspondent and author of "Trillions," dives deep into the transformative history of index funds. He discusses how passive investing has reshaped the market, but at a cost of efficiency and increased power concentration among fund managers. The conversation also explores inflation, central banks' responses, and the implications of trading scandals on public trust in financial institutions. Wigglesworth sheds light on the speculative nature of today's markets, influenced by meme stocks and cryptocurrencies.
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Origins of Index Fund Theory
- The intellectual roots of index funds trace back to Louis Bachelier's 1900 PhD thesis, "The Theory of Speculation."
- Bachelier's work, later rediscovered by economists like Paul Samuelson, laid the groundwork for the random walk and efficient market theories.
Development of Market Theories
- Bachelier's work spread through economists like Jimmy Savage and Paul Samuelson, influencing figures like Eugene Fama.
- Simultaneously, Harry Markowitz's work in the 1950s revolutionized portfolio theory by introducing the concept of risk vs. reward.
William Sharpe's Contributions
- William Sharpe, initially aiming to be a doctor, switched to economics and simplified Markowitz's complex calculations.
- He introduced 'beta' to represent market correlation and developed the Sharpe ratio and the capital asset pricing model.
