What sparks an investing revolution?

WHAT prompts a revolution? When it comes to investing, no change has been as great as that which began with researchers at the University of Chicago in the 1960s. Their financial-theory revolution changed the way that almost everyone invests, and made speculators many trillions of dollars.

The transformation is the subject of Tune Out the Noise, a documentary by Errol Morris, an Academy Award winner, which held its premiere in New York on March 6. His film includes interviews with academics and investors, such as Eugene Fama, Myron Scholes and David Booth, who took ideas about market efficiency and diversification from the textbook and put them into practice in the markets. This led to a surge in the use of data and a disciplined focus on costs, in turn providing the foundation for modern passive investing.

Morris’ film may, in theory, be about brilliant individuals, but its most powerful message is about the role played by chance. History, like markets, is affected by randomness, and luck brought together the right people at the right time. Each had to be present for the financial revolution to emerge.

The University of Chicago’s role is just about the only part of the story that happened by design. It had become the nexus for financial research owing to its reputation for excellence in economics. The Centre for Research in Security Prices was established there in 1960, and its wealth of data on the price of bonds and stocks over decades enabled the academics to do their work.

Randomness is apparent just about everywhere else. Although Fama, who would later win a Nobel prize for his work on asset pricing, completed a doctorate at Chicago in 1964, he almost never made it to the university. After completing an undergraduate education at Tufts University, he had to chase up his application to Chicago, discovering that it had never been received. On phoning the university, he reached the dean of students by chance, who told him about a scholarship for Tufts graduates, before offering it to him on the spot.