Kent Daniel — From Physics to Finance: Exploring Market Inefficiencies

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Jul 25, 2025

Kent Daniel, Professor of Finance at Columbia Business School and former Goldman Sachs researcher, charts his unique journey from physics to finance. He critiques the Fama-French model and discusses the significant role of intangible information in asset prices. The conversation dives into market inefficiencies, behavioral finance, and the dynamics of short selling. Kent also reflects on how psychological biases impact investor decisions and the future evolution of quantitative value investing in a changing financial landscape.

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ANECDOTE

Kent Daniel's Caltech Experience

Kent Daniel studied physics at Caltech, attending a class taught by Richard Feynman which left a lasting impression.
The challenging environment at Caltech humbled him and ignited a passion for explaining complex ideas simply.

INSIGHT

Market Return Predictability Uncovered

Kent developed powerful statistical tests showing market returns are predictable, challenging previous beliefs.
Earlier tests lacked power and failed to detect this predictability, clarifying long-standing confusion.

INSIGHT

Challenge to Fama-French Model

Daniel and co-authors showed value and growth stock returns depend more on stock characteristics than factor covariances.
This challenges the core Fama-French three-factor model and supports behavioral finance perspectives.

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In this episode of Value Investing with Legends, Tano Santos and Michael Mauboussin sit down with Kent Daniel, Professor of Finance at Columbia Business School, to discuss his journey from physics at Caltech to leading research in behavioral finance and quantitative investing. Kent shares insights from his academic work and his years at Goldman Sachs, including his critiques of the Fama-French model, the role of intangible information in asset prices, and the implications of short selling constraints. The conversation spans decades of market evolution, empirical challenges, and the behavioral patterns that continue to shape financial theory and practice.

Key Topics:

● Introduction by Tano Santos and Michael Mauboussin (0:00)

● Introduction of guest Kent Daniel and his academic and professional background (0:48)

● Kent shares his early life, education at Caltech, and influences like Richard Feynman (3:31)

● Transition from physics to finance, MBA at UCLA, and entry into PhD program (5:46)

● Kent's dissertation on time variation in asset returns and statistical test power (8:02)

● Discussion on behavioral vs. rational explanations for return predictability (11:51)

● Kent's time at University of Chicago during the rise of behavioral finance (15:18)

● Challenge to the Fama-French three-factor model with characteristics vs. covariances paper (22:40)

● Behavioral finance classic: Overreaction and underreaction explained through psychology (27:31)

● Discussion on tangible vs. intangible information in financial markets (36:04)

● Current research on short selling, borrow costs, and market inefficiencies (41:40)

● Kent's experience at Goldman Sachs and practical application of academic research (50:02)

● Reflections on the quant crisis and build-up of leverage pre-2008 (56:26)

● Discussion on value investing post-2008 and limitations of book-to-market (57:00)

● Kent’s nuanced view on market efficiency and the role of frictions (1:02:16)

● Views on indexing, ETFs, and financial market design (1:06:11)

● Kent shares what excites and worries him about the future of markets (1:08:09)

● Kent's current reading and listening recommendations (1:10:07) And much more!

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