Poor communications and the incentives to publish their research in authoritative journals are hindering the union of academia and the commercial world in financial economics. Several leading academics spoke about the system’s failures at the annual Investment Management Research Conference.
A soul-searching session at last week’s conference, run by University of Technology Sydney in association with Graham Rich’s Portfolio Construction Forum, looked at the issues facing financial academics doing research.
Professor Ron Bird of UTS said that there should be a new stimulus to support academics’ work. “Academic journals are not a very good way of being published,” he said. “There are many issues to do with them, including the incentive structures.”
The session, which included six leading academics from Australia and overseas, was chaired by Jack Gray, fund manager – formerly with GMO and currently with Brookvine – and part-time academic with UTS. They discussed the greatest contributions of empirical research in financial economics and the most important opportunities to arise from them.
They did not go easy on their own academic profession in the process. Gray paraphrased Einstein: “Research is what I’m doing when I don’t know what I’m doing.” He drew a parallel with a critique of medical research which claimed most medical research was likely to lead to false results. The research included a misuse of statistics, a misunderstanding of the statistics, pressure to publish and a failure to produce negative results.
In financial research, Campbell R. Harvey, who delivered this year’s Presidential Address to the American Finance Association – publisher of one of the most prestigious journals – has been similarly critical. He said early this year: “Given the competition for top journal space, there is an incentive to produce ‘significant’ results. With the combination of unreported tests, lack of adjustment for multiple tests, and direct and indirect p-hacking [sometimes called ‘data dredging, where patterns in data are presented without at first establishing a hypothesis], many of the results being published will fail to hold up in the future.” He urged both authors and researchers to take more risks with what they publish.
“So, he’s saying that most claimed research findings in financial economics are likely false. It’s like fake news,” Gray told last week’s IMR conference in Sydney.
Robert Faff, a professor at the University of Queensland, said communications were important. “You [academics]should not just say to the industry ‘go and read my paper in the journal’. They just don’t have the time.”
Stephen Brown, a professor at Monash University, said there was a lack of recognition of the practical worth of ideas. “I think the future lies in the past,” he said, “in going back to basics. The practical world is far ahead of the academic world in treating textual analysis and big data.”
Rich said that the conference program was designed to bring together practitioners and academics. He knew, from personal experience when he was running Morningstar in Australia, that Professor Faff, for instance, was passionate about growing the commitment to research. Faff had asked for access to the Morningstar database for his work and was ultimately given it.
– Greg Bright