November 1, 2017 / 10:32 PM / a year ago

Breakingviews - Chicago School gets $125 mln for being wrong

Ken Griffin, Founder and Chief Executive Officer of Citadel, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017. REUTERS/Lucy Nicholson

LONDON (Reuters Breakingviews) - Oh the irony. Chicago University is getting a $125 million gift from hedge-fund founder Ken Griffin. The “Chicago School” of economics, as it’s called, leans heavily towards free and efficient markets. Citadel boss Griffin’s name and cash – earned in a business that depends on markets being inefficient – will now endow the university’s economics department.

To be fair, it’s not all Milton Friedman laissez-faire and Eugene Fama efficient-markets theory at Chicago. Look no further than this year’s Nobel Prize in Economics, awarded to behavioral economist Richard Thaler. His work on human biases might help explain many investors’ willingness to pay huge fees to hedge funds like Citadel even when, as recently, the industry’s performance has looked anemic, at least compared with a straightforward punt on the U.S. stock market.

Yet the irony remains inescapable. Most hedge funds exist to generate so-called alpha – a return over and above the average in the relevant market. That’s their pitch, and that’s how they justify fees that archetypically run at 2 percent of assets and 20 percent of gains. Fama’s famous theory, which underpins lots of economic and financial models, argues that’s impossible.

Regardless, Griffin has made his money – some $8.5 billion, according to last month’s Forbes 400 list of the wealthiest Americans – in the real world, and kudos to him for committing to give some more of it away. It’s Chicago’s second-largest gift ever, after David Booth’s $300 million for the business school. As the founder of an investment firm built on a belief in efficient markets, Booth’s name on the economics department and Griffin’s on the business school might seem more logical. In terms of where scholars officially sit, though, there’s a lot of overlap.

Thaler, a professor at the business school, exemplifies the range of academic views in play at Chicago these days. Money talks, but in this case it probably wouldn’t have been necessary to open minds. Griffin, already a trustee of the university, lauded in his statement an institution “fundamentally committed to free expression, fierce debate, and intellectual pursuit” and a culture of “rigorous questioning and open discourse.” Amen to that, and to those willing to pay for it.


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