Western Law was pleased to welcome Nobel Prize-winning economist Myron Scholes on March 31 to deliver the 6th Annual Western Law Business and Law Lecture, part of Western Law’s Torys LLP Corporate and Securities Law Forum. Scholes spoke on “The Costs of Constraints: Risk Management, Agency Theory and Asset Prices,” based on a paper he co-authored with Ashwin Alankar and Peter Blaustein.
The key to these pricing anomalies, Scholes argued, may actually lie in rational decisions made by sophisticated investment managers who are subject to specific investment constraints of tracking error or liquidity. In other words, pricing anomalies are not the result of mysterious hidden risks or irrational behavioral anomalies.
Instead, “investment managers rationally chose to hold inefficient portfolios to meet investment constraints,” said Scholes. And of course if many investment managers face the same constraints,they will, rationally, demand the same (high volatility) assets. That demand, in turn, will drive up the price of those assets, higher than the prices predicted in standard asset-pricing models that assume that market players are not subject to such constraints.
The implications of this research are significant. The costs of bench marking and tracking error constraints, as Scholes demonstrated, could be very significant and have important implications for investors, the investment management industry,and, by extension, the legal and regulatory environment in which they operate.
“Myron Scholes is one of the most important economists and innovative thinkers of our time,” said Professor Christopher Nicholls,noting that this was Scholes’ second visit to Western Law. “Many students who met Prof. Scholes when he last visited the law school described the experience as one of the highlights of their time at Western Law. I’m pleased to say that his visit last Tuesday was equally exciting for our current cohort of students and for many other members of the Western community.”
The Western Law Business and Law Lecture was originally launched thanks to a generous gift from Western alum Geoff Beattie,LLB’84. Past speakers in this distinguished lecture series include two other Nobel Prize-winning economists—Robert Shiller and George Akerlof—as well as Leo E. Strine Jr., Chief Justice of the Delaware Supreme Court; Lawrence Summers, former U.S. Treasury Secretary; and President Emeritus of Harvard University, and prominent Yale University economist Gary Gorton.
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