Ricardo Research has been formed to apply the ideas developed by the Paul Woolley Centre for the Study of Capital Market Dysfunctionality to the world of institutional investing. Building on the body of theory emerging from the Centre, Ricardo Research aims to transform the way that investors think about financial markets, with the ultimate goal of fostering a more socially useful financial system.

The Paul Woolley Centre was founded at the London School of Economics in 2007 under the direction of Professor Dimitri Vayanos. Its objective is to produce and disseminate high-quality research focused on the workings of capital markets and the social efficiency of allocations achieved in these markets. The Centre is supported by a team of finance professors, faculty members and doctoral students.

Over the last decade, research undertaken at the Centre has led to the development of a set of theories which explain asset mispricing and its adverse consequences for the savings and investment process and the broader economy. The policy implications of these theories are profound and extensive, especially for the management of asset portfolios.

Ricardo Research will work closely with the Paul Woolley Centre to translate their research findings into practical advice. In the spirit of the 19th century economist and investor David Ricardo, we seek to apply bold new academic insights to the stark challenges confronting large institutional investors.

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Defensive diversification

By treating diversification as an unmitigated good, investors by and large ignore the damage that it does to returns. We would do well to channel Buffett who once remarked that “diversification is protection against ignorance; it makes little sense if you know what you’re doing.” The outcome of an obsession with benchmark-relative performance together with principal-agent problems is “defensive diversification”.

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Asset mispricing: the ignored externality

The externalities of greatest interest in contemporary discussion typically fall under the E, S and G headings. However, this leaves a critically important externality – that of asset mispricing – largely ignored. Asset owners should broaden their awareness of the externalities that arise from their investment approach.

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