Wednesday, November 20, 2013 9:50am

Diversification

In general, absent any inside information, an equity investor can expect to do better by choosing a well-diversified, low-cost index fund than by picking a few stocks.

Responses
 

Source: IGM Economic Experts Panel
www.igmchicago.org/igm-economic-experts-panel

Responses weighted by each expert's confidence

Source: IGM Economic Experts Panel
www.igmchicago.org/igm-economic-experts-panel
Participant University Vote Confidence Comment Bio/Vote History
Acemoglu Daron Acemoglu MIT Agree 7
Bio/Vote History
         
Alesina Alberto Alesina Harvard Did Not Answer
Bio/Vote History
         
Altonji Joseph Altonji Yale Strongly Agree 9
Bio/Vote History
         
Auerbach Alan Auerbach Berkeley Strongly Agree 9
Bio/Vote History
         
Autor David Autor MIT Strongly Agree 8
Bio/Vote History
         
Baicker Katherine Baicker Harvard Agree 3
Bio/Vote History
         
Banerjee Abhijit Banerjee MIT Strongly Agree 9
Bio/Vote History
         
Bertrand Marianne Bertrand Chicago Strongly Agree 3
Bio/Vote History
         
Brunnermeier Markus Brunnermeier Princeton Agree 9
Bio/Vote History
         
Chetty Raj Chetty Harvard Strongly Agree 8
Bio/Vote History
         
Chevalier Judith Chevalier Yale Strongly Agree 9
Stock picker bears a lot of idiosyncratic risk
Bio/Vote History
         
Currie Janet Currie Princeton Strongly Agree 9
Bio/Vote History
         
Cutler David Cutler Harvard Agree 7
Bio/Vote History
         
Deaton Angus Deaton Princeton Agree 7
"Better" is delightfully vague.
Bio/Vote History
         
Duffie Darrell Duffie Stanford Strongly Agree 10
Sounds like a trick question! This one is obvious: diversification is a big benefit, even putting aside fee savings.
Bio/Vote History
         
Edlin Aaron Edlin Berkeley Strongly Agree 10
The typical investor is certainly best off buying a low-cost indexed fund. That said, money may be makable without inside information.
Bio/Vote History
         
Eichengreen Barry Eichengreen Berkeley Agree 7
Bio/Vote History
         
Einav Liran Einav Stanford Disagree 7
Bio/Vote History
         
Fair Ray Fair Yale Agree 5
Bio/Vote History
         
Finkelstein Amy Finkelstein MIT Strongly Agree 10
Bio/Vote History
         
Goldberg Pinelopi Goldberg Yale Agree 6
Bio/Vote History
         
Goolsbee Austan Goolsbee Chicago Strongly Agree 10
(DUH)
Bio/Vote History
         
Greenstone Michael Greenstone Chicago Strongly Agree 7
Bio/Vote History
         
Hall Robert Hall Stanford Did Not Answer
Bio/Vote History
         
Hart Oliver Hart Harvard Strongly Agree 10
In equilibrium the typical investor cannot beat the market. Thus a well-diversified buy and hold strategy is best for such an investor
Bio/Vote History
         
Holmström Bengt Holmström MIT Strongly Agree 9
Bio/Vote History
         
Hoxby Caroline Hoxby Stanford Agree 9
There is ample empirical evidence for this claim.
Bio/Vote History
         
Hoynes Hilary Hoynes Berkeley Strongly Agree 10
Bio/Vote History
         
Judd Kenneth Judd Stanford Strongly Agree 10
Bio/Vote History
         
Kaplan Steven Kaplan Chicago Strongly Agree 9
Bio/Vote History
         
Kashyap Anil Kashyap Chicago Strongly Agree 7
Almost everyone should be investing in this way and ignoring tips from friends and experts on particular stocks.
Bio/Vote History
         
Klenow Pete Klenow Stanford Strongly Agree 10
Keepi the expense ratio down!
-see background information here
Bio/Vote History
         
Levin Jonathan Levin Stanford Agree 5
Key words here are "in general" - most people are unlikely to replicate Warren Buffett's performance.
Bio/Vote History
         
Maskin Eric Maskin Harvard Agree 8
Bio/Vote History
         
Nordhaus William Nordhaus Yale Strongly Agree 8
Bio/Vote History
         
Obstfeld Maurice Obstfeld Berkeley Uncertain 10
Literally, "expected" return may be higher than for diversfied basket, despite higher variance. Does "do better" include pain of variance?
Bio/Vote History
         
Saez Emmanuel Saez Berkeley Agree 3
Bio/Vote History
         
Samuelson Larry Samuelson Yale Agree 8
Picking a few stocks makes sense only if one has better information than the market, which is unlikely without inside information.
Bio/Vote History
         
Scheinkman José Scheinkman Princeton Strongly Agree 9
Bio/Vote History
         
Schmalensee Richard Schmalensee MIT Agree 7
Not a great question: "a few stocks" might hit it big, "do better than" and "in general" are not well-defined.
Bio/Vote History
         
Shapiro Carl Shapiro Berkeley Strongly Agree 8
Diversification rocks. Perhaps there are some exceptions for some investors, e.g., based on a tax angle.
Bio/Vote History
         
Shimer Robert Shimer Chicago Strongly Agree 9
Aggregate stock returns have some forecastibility, but this is a question about individual stocks
Bio/Vote History
         
Shin Hyun Song Shin Princeton Did Not Answer
Bio/Vote History
         
Stokey Nancy Stokey Chicago Strongly Agree 10
You could do the diversification and periodic rebalancing yourself, and perhaps save a few dollars in transaction costs, but why bother?
Bio/Vote History
         
Thaler Richard Thaler Chicago Strongly Agree 10
The annual test to see whether panelists are awake.
Bio/Vote History
         
Udry Christopher Udry Yale Strongly Agree 9
Unless, of course, you *like* the thrill of gambling.
Bio/Vote History
         

10 New Economic Experts join the IGM Panel


For the past two years, our expert panelists have been informing the public about the extent to which economists agree or disagree on important public policy issues. This week, we are delighted to announce that we are expanding the IGM Economic Experts Panel to add ten new distinguished economists. Like our other experts, these new panelists have impeccable qualifications to speak on public policy matters, and their names will be familiar to other economists and the media.

To give the public a broad sense of their views on policy issues, each new expert has responded to a selection of 16 statements that our panel had previously addressed. We chose these 16 statements, which cover a wide range of important policy areas, because the original panelists' responses to them were analyzed in a paper comparing the views of our economic experts with those of the American public. You can find that paper, by Paola Sapienza and Luigi Zingales, here. The paper, along with other analyses of the experts' views, was discussed during the American Economic Association annual meetings, and the video can be found here.

The new panelists' responses to these statements can be seen on their individual voting history pages. Our ten new economic experts are:

Abhijit Banerjee (MIT)
Markus K. Brunnermeier (Princeton)
Liran Einav (Stanford)
Amy Finkelstein (MIT)
Oliver Hart (Harvard)
Hilary Hoynes (Berkeley)
Steven N. Kaplan (Chicago)
Larry Samuelson (Yale)
Carl Shapiro (Berkeley)
Robert Shimer (Chicago)


Please note that, for the 16 previous topics on which these new panelists have voted, we left the charts showing the distribution of responses unchanged. Those charts reflect the responses that our original panelists gave at the time, and we have not altered them to reflect the views of the new experts.

We have also taken this opportunity to ask our original panelists whether they would vote differently on any of the statements we have asked about in the past. Several experts chose to highlight statements to which they would currently respond differently. In such cases, you will see this "revote" below the panelist's original vote. We think you will enjoy seeing examples of statements on which some experts have reconsidered.

As with the 16 previous statements voted on by new panelists, these "revote" responses are not reflected in the chart that we display showing the distribution of views for that topic: all the charts for previous questions reflect the distribution of views that the experts expressed when the statement was originally posed.

About the IGM Economic Experts Panel

This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

Finally, it is important to explain one aspect of our voting process. In some instances a panelist may neither agree nor disagree with a statement, and there can be two very different reasons for this. One case occurs when an economist is an expert on a topic and yet sees the evidence on the exact claim at hand as ambiguous. In such cases our panelists vote "uncertain". A second case relates to statements on topics so far removed from the economist's expertise that he or she feels unqualified to vote. In this case, our panelists vote "no opinion".

The Economic Experts Panel questions are emailed individually to the members of the panel, and each responds electronically at his or her convenience. Panelists may consult whatever resources they like before answering.

Members of the public are free to suggest questions (see link below), and the panelists suggest many themselves. Members of the IGM faculty are responsible for deciding the final version of each week’s question. We usually send a draft of the question to the panel in advance, and invite them to point out problems with the wording if they see any. In response, we typically receive a handful of suggested clarifications from individual experts. This process helps us to spot inconsistencies, and to reduce vagueness or problems of interpretation.

The panel data are copyrighted by the Initiative on Global Markets and are being analyzed for an article to appear in a leading peer-reviewed journal.

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