Eugene F. Fama arrived at the then–Graduate School of Business by pure “serendipity,” as he puts it. A college senior on the cusp of graduation, the man who would go on to become the father of the efficient-market hypothesis discovered his application to Chicago’s PhD Program had never been received. Thankfully for the school—and for the history of finance—it was quickly rectified, and he’s been here ever since.
That includes a special day in 2013, when he still showed up to teach on the morning he won the Nobel Prize in Economic Sciences. “I had never missed a class in all the years I’d been teaching,” said Fama, MBA ’63, PhD ’64, and the Robert R. McCormick Distinguished Service Professor of Finance. “I wasn’t going to start now.”
He first crossed paths with David Booth, ’71, in the classroom, and Fama called him his “best student” at the time. It was Booth who took his mentor’s ideas—that stock prices reflect all relevant information, so beating the market consistently is nearly impossible—and applied them in the real world.
In 1981 Booth and another alumnus, Rex Sinquefield, ’72, founded Dimensional Fund Advisors, which now manages $579 billion, mainly for institutions and individuals who invest through financial advisers. After he and Sinquefield started Dimensional, they put Fama on its management board and faculty members Merton Miller and Myron Scholes, MBA ’64, PhD ’69, on its mutual fund board, and all three men would go on to win Nobel Prizes. In 2008 David Booth gave a gift to the school valued at the time at $300 million, and the Graduate School of Business was renamed after him. “I wouldn’t have been anywhere without Chicago,” said Booth.
In a recent conversation at Harper Center, moderated by Bloomberg Opinion columnist Barry Ritholtz, Fama and Booth recounted to today’s Booth students how it all began. An edited version follows.
Ritholtz: Eugene, you were in your senior year at Tufts. You had applied here but you never heard back from the school.
Fama: Right. I called and the dean of students, Jeff Metcalf, AM ’53, answered the phone. We chatted for a while and he said, “Well, hate to tell you, but we don’t have any record of your application. What kind of grades do you have at Tufts?” And I said, “Pretty much all As.”
He said, “Well, we have a scholarship for someone from Tufts. Do you want it?” And that’s how I ended up at the University of Chicago.
Ritholtz: You came here as a student. You were finishing your work. Eventually Merton Miller said to you, “Hey, do you want to stick around and keep doing the sort of research you’re doing?” Is that how you became a professor here?
Fama: Yes, when I came here to Chicago, research on asset prices had begun to get going in a really serious way. People were interested in the question of how well stock prices adjusted to new information. I would say it started because of computers. Before 1960 we really didn’t have a serious computer to do data analysis on.
And with the coming of computers, economists had a new toy to play with, and stock prices were easily available. Immediately the economists said, “Well, how would we expect prices to behave if markets work properly?” In other words, if markets are efficient.
“When I came here to Chicago, research on asset prices had begun to get going in a really serious way.”
Ritholtz: David, you grew up in Kansas and you got a BA in economics and a master’s degree from the University of Kansas. What made you decide to come to Chicago?
Booth: I had a finance professor there, and he said, “Finance is exploding and really emerging as an academic discipline. One of the epicenters is clearly Chicago.” I thought, maybe I can become a professor, so I applied here. I took Gene’s class, my very first class, 50 years ago this past fall.
Ritholtz: You’ve called taking Gene’s class “life changing and transformative.” How so?
Booth: I think there was this theory that we can improve people’s lives and, you know, a real purpose to all of this. Gene was more on the research side. I’ve got my role in all of this, more on the application of the ideas.
Ritholtz: Why not a career in academia?
Booth: Well, first off, I realized I could never compete with Gene. I mean, he was at the top of the mountain. I just saw this as a great opportunity to apply all these ideas. Every new paper coming out was a landmark paper. It was all brand-new stuff, and none of it was being applied.
What was going on in Chicago then really changed the way people think about investing. That’s really been the theme, and Gene has changed the way people think about investing more than any of them.
“It was all brand-new stuff, and none of it was being applied. What was going on in Chicago then really changed the way people think about investing.”
Ritholtz: Let’s talk about the practical application of Gene’s theories. You had worked for a while and you and Rex decided to open a small micro-cap fund out of your second bedroom in your apartment in Brooklyn.
Booth: My first call was to Gene. I said, “Look. In 10 years, since I was in school, there’s been a lot of research. We need to have some access to new research and thinking. Would you be one of the founders and be our eyes on the latest research?” He agreed.
We wanted to create a mutual fund, and a mutual fund has to have an independent board of directors. Myron Scholes agreed to join, and so did Merton Miller. Until recently, all the independent directors on our mutual fund have taught at Chicago.
Fama: It’s hard to shut me up. I don’t take guidelines too easily. He and Rex never said, “Would you please do this?” What they said was, “You do what you do, and we’ll figure out if we can use any of it.”
Booth: He’d go, “I don’t know if your clients are willing to hear this.” And I’d go, “Look, Gene, say what’s on your mind. Spin control is my department.”
Ritholtz: In 2013 Gene got a phone call from Sweden. Did the phone call manage to reach you?
Fama: It was really early in the morning. You never expect to get it, but somehow the people here had guessed it, because there were newspaper people at my door 10 minutes later. They wanted to come into my house. I said, “No way.” I had a class that morning.
Booth: I said to Gene, “Give me a night to organize something special.” [Swedish pop group] ABBA has a museum in Stockholm that had just opened. I talked the museum into renting me the space for the evening when we were there for the prize ceremony. Gene has four kids and 10 grandkids, and they’re all big music fans. The museum has a big stage with a screen with the four ABBA musicians singing on it and with a microphone right in the middle. It looks like you’re singing with them. The kids went wild.
I looked over at Gene, and I could see that he was having fun too. That made it special for me.
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