Capital Ideas

Lubos Pastor, professor of Finance at the University of Chicago Booth School of Business, discusses how contrary to conventional wisdom, stocks are riskier in the long run. Investors are often told that stocks are highly risky for anyone investing for a period of five years or less. Extend that to 15 years or more, and they are told the risk of owning stocks falls dramatically because a longer investment period allows more time for a bull market to cancel out a bear market. This conventional wisdom has become the cornerstone of long-term investing and is supported by the historical performance of stocks. However, according to a recent study by Pastor and Robert F. Stambaugh of the University of Pennsylvania, investors should pay attention not only to historical estimates, but also to the uncertainty associated with those estimates. This uncertainty compounds over time, so that its effect on the volatility of stocks increases, and the volatility over long periods of time can be so high

Stavros Panageas, assistant professor of Finance at the University of Chicago Booth School of Business, discusses how contracts with distorted payoffs should encourage a long-term view to offset risk shifting, which can occur when firms face financial distress. When a company is about to go broke, it might be tempted to take on risky projects that promise high returns. Shareholders reap the benefits of this gamble if the projects succeed, but otherwise creditors bear the loss. Shareholders are essentially taking a bet with the creditors' money. This situation arises whenever the expected payoffs of managers' investment choices allow them to cash in on the upside, but avoid being penalized for the downside. Compensation contracts for managers are sometimes structured in a way that generates such lopsided payoffs. A study by Panageas and Mark M. Westerfield of the University of Southern California, argues that the implicit or explicit length of a contract is an important factor for this

John C. Heaton, professor of Finance at the University of Chicago Booth School of Business, discusses what happens when "consumption strikes back" and how fundamental economic variables regain importance in explaining risk premiums in stock markets. He also discusses how a decline in the stock market today may reflect an underlying shock to the economy that will not dissipate quickly and will have an impact over a long horizon. Stocks that closely follow business cycles are considered riskier, because they will typically fall at the first hint of a downturn and rise faster as the economy recovers. From the investors' perspective, stocks of companies whose earnings are most affected by economic conditions should promise a bigger return. Many people then believe that an economic recession goes hand in hand with a bear market. However, Heaton says this often has not been true in the past, and value stocks, those with low market values relative to the fundamental factors that determine the

Veronica Guerrieri, associate professor of economics at the University of Chicago Booth School of Business, discusses the "sharp contraction" that occurred following the late-2000s financial crisis. When the crisis hit, banks tightened lending and restricted consumers' credit. The pressure on households to repay debts quickly and save more right after a credit shock can lead to a large fall in consumption. The central bank may step in to boost consumption, but the recession that follows can be so deep that the central bank may not be able to bring interest rates down to the level where it can sufficiently stimulate spending. The fact that a credit crisis can lead the economy into a "liquidity trap" seems consistent with historical experience, as seen in Japan in the 1990s and in the US during the Great Depression. For more information, visit ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining

Dan Adelman, Professor of Operations Management at the University of Chicago Booth School of Business, speaks about research he recently published, "Optimal Mix: Managing a Portfolio of Supply Contracts." Read more: Shanshan Wang ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas. #UChicago on the Web: Home: News: Facebook: Twitter: Instagram: University of Chicago on YouTube: /uchicago *** ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email digicomm@uchicago.edu.

Burhaneddin Sandıkçı, Assistant Professor of Operations Management at the University of Chicago Booth School of Business, speaks about research recently published by him on "The Price of Privacy." Read more at: ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas. #UChicago on the Web: Home: News: Facebook: Twitter: Instagram: University of Chicago on YouTube: /uchicago *** ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email digicomm@uchicago.edu.

Emily Oster, Assistant Professor of Economics at the University of Chicago Department of Economics, talks about her research on the impact of television on women in rural India. For more on her research visit: ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas. #UChicago on the Web: Home: News: Facebook: Twitter: Instagram: University of Chicago on YouTube: /uchicago *** ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email digicomm@uchicago.edu.

Minding the Racial Wage Gap: The Role of Prejudice in Black Wages: (Research by Kerwin Kofi Charles and Jonathan Guryan) Kerwin Kofi Charles, Steans Family Professor at the University of Chicago Harris School of Public Policy, speaks on research conducted by him and Jonathan Guryan. For more about this research visit: ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas. #UChicago on the Web: Home: News: Facebook: Twitter: Instagram: University of Chicago on YouTube: /uchicago *** ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email digicomm@uchicago.edu.

Damon J. Phillips, Professor of Organizations and Strategy at the University of Chicago Booth School of Business, gives an introduction to how sociology informs the study of business at Chicago Booth. For more on this topic visit: ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas. #UChicago on the Web: Home: News: Facebook: Twitter: Instagram: University of Chicago on YouTube: /uchicago *** ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email digicomm@uchicago.edu.

Elizabeth G. Pontikes, Assistant Professor of Organizations and Strategy at the University of Chicago Booth School of Business, speaks about her research on the evolution of categories and identity within organizations. For more about this research visit: ➡ Subscribe: About #UChicago: Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas. #UChicago on the Web: Home: News: Facebook: Twitter: Instagram: University of Chicago on YouTube: /uchicago *** ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email digicomm@uchicago.edu.