Most subjects of human enquiry are supported by a generally acknowledged and respected theoretical framework which explains how things work and why they sometimes fail. The field of finance is poorly served in this regard, supported only by an academic theory that predicts the perfection of “efficient markets” while ignoring market imperfections.

As a result, investors and practitioners are left to fend for themselves drawing on convention, past experience and a theory they don’t believe in to inform their actions. It is hardly surprising that the finance industry is failing society with its periodic crashes, vast cost and unaccountability.

The theory developed at The Paul Woolley Centre, supported by empirical studies, represents a radically new approach that takes into account the principal-agent problems arising when asset owners delegate responsibility to asset managers. It shows that asset mispricing can occur despite all market participants acting prudently to maximize profits in light of the available information.

The new framework offers fuller and more convincing explanations for the principal forms of asset mispricing than have so far been presented in the academic or practitioner field. The implications extend to all market participants; both for private strategies and for the social ends of better functioning markets.

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Long-term investors using short-term strategies

Large institutional investors who claim to invest with a long horizon and who wish to be seen as champions of a socially responsible form of capitalism, may in fact be contributing to dysfunctional capital markets in which short-termism dominates long-term thinking.

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50 years of efficient market thinking

Fifty years on from its inception, the efficient markets hypothesis still exerts a powerful grip on investors. The widespread reliance on market cap indices as benchmarks for active manager success creates a pervasive tendency towards performance-chasing across the industry. Large asset owners have the power to change this dynamic by changing the way that they engage with and monitor their managers.

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