Things I've Learned from Gene

By Kenneth R. French

Gene Fama has taught us a lot over the last 50 years. The other presentations today focus on his
contributions to asset pricing, corporate finance, and banking. I take a broader perspective and
describe some of the things Gene has taught me about doing research, writing papers, and life in
general.

Gene is a wonderful mentor who has extraordinary insights and shares them generously. Some of the
lessons I describe are clearly things he meant to teach. Others, however, are inferences I have drawn
from our interactions. Since these inferences may be wrong, I worry that Gene will deny or even
vehemently disagree with what I say. I am usually surprised and often dismayed when I hear students
summarize what they learned in my Investments class. I hope Gene does not have the same reaction
to my comments.

Use Your Time Wisely

Many of us know Genes first recommendation about time management: If you are not willing to do
something now, dont agree to do it later. The logic is straightforward. You will probably be as busy
later as you are now so unless the benefits will be substantially higher in the future, if you dont want
to do something now you will probably regret having to do it later.

Genes second recommendation is less well-known: Resist deadlines. Obviously, this advice is not
intended for those who need deadlines to get anything done. But for the rest of us, there is no reason
to let deadlines determine our priorities or make us work harder than we want.

Gene typically gives students and colleagues detailed comments on their papers a day or two after he
is asked. He does referees reports almost as quickly. Together, Genes first two time management
recommendations explain this peculiar behavior. Assume you will actually do everything you plan to
do and you set your own priorities. Then the benefit of immediacy should determine what you do
today. Start with the task whose payoff per hour of labor declines most quickly. In Genes case, quick
feedback enhances a colleagues productivity and sends a strong signal about the value Gene places
on the colleagues research. Similarly, a quick referees report improves the authors productivity and
the reputation of the journal. If the benefit of immediacy is highest for these tasks, they should be at
the top of the stackand that is where Gene puts them.

Randomness Happens

Many years ago, while trying to convince Gene that a marginal candidate deserved tenure, I compared
the candidate to one of our less productive tenured colleagues. His response destroyed my argument,
You make enough mistakes by mistake, dont make one on purpose.

This is one of my favorite Fama quotes. Gene was making a specific pointdont let a bad draw
reduce your standard for future decisionsbut I interpret his statement more broadly: Even with
unbiased forecasts, the effect of uncertainty can be asymmetric. This is obvious when we consider
things like risk aversion and option pricing, but it may not be so obvious in other contexts.

While preparing this talk, I finally figured out why my life always seems more frenetic than Genes. I
have been ignoring estimation error when deciding what I should agree to do. Whenever it looks like
Ill have some slack in my schedule, I commit to do more and, if things turn out better than expected,
I add even more. Unfortunately, this strategy leaves no room for tasks that take longer than
expected. Even ignoring the optimism in my forecasts, my approach ensures that if anything goes
wrong I am screwed.

Make Good Statistical Inferences

Gene has trained himself to make good statistical inferences, both professionally and in more general
settings. When I was about 40, a younger friend passed away. While chatting with Gene about the
tragedy, I said it bothered me not only because had I lost a friend, but also because his death at a
young age caused me to reassess my own mortality. Without a pause, Gene replied, Thats OK. I saw
a 94 year old yesterday.

Genes ability to avoid statistical traps probably contributes to his skepticism about behavioral finance.
Many of us read research about flawed decision making and say, Sure, that seems like a plausible
description of peoples behavior. Gene looks at the same research and thinks, Why would anyone do
that?

All Interesting Models are False

Gene is arguably the best empiricist in finance. Although there are lots of reasons for his success,
three of the most important are easy to describe. First, his empirical approach fully embraces the fact
that models simplify the world. This insight implies that all interesting models are false and that most
of the hypotheses people test in finance are also false. For example, no continuous random variable
actually has an expected value of zero. With enough data we will always reject such a precise null.

Genes goal when doing empirical work is to improve our understanding of important real world
phenomena. He is not interested in testing models he knows are false. When presenting results, he
emphasizes parameter estimates and the precision of the estimates, not formal tests. This emphasis
explains why he says, for example, an estimate is reliably different from zero, not significantly
different from zero. It also explains his aversion to papers that focus only on test statistics or, even
worse, p-values.

Simpler is Better

When asked to describe my research, a colleague who does theoretical work once said, All Ken does
is calculate averages ... but he does it very well. Im not sure whether that was meant as a
compliment, but after working with Gene for 30 years, I view it as high praise. Simplicity is a hallmark
of Genes research. When writing papers, he works hard to make his logical arguments and statistical
tests as simple as possible. He rarely uses a formal model to motivate his empirical work and when he
turns to the data he says, If you cant see it in the averages, its probably not there.
Know the Data

One of the most important reasons for Genes success as an empiricist is his investment in the data. It
is obvious that anyone who hopes to do good empirical work must pay attention to the data. But
Genes commitment goes far beyond that. When he begins working with new data, he spends days
simply getting familiar with them. When he looks at empirical tests, he pores over the output,
memorizing the central results and developing a thorough understanding of the rest. And when Gene
considers someone elses work, he usually starts with the tables and then decides whether to read the
text.

I try to replicate Genes commitment, studying each new database and poring over test results. What
I cannot replicate is his amazing memory. While I struggle to remember the paper we just finished, he
can describe the evidence from ancillary tests we did 25 years ago. After five decades of study, Gene
knows more about financial data than Google. The value of this is apparent not only in his own
research, but also in his advice to students, his suggestions in seminars, and his comments on
colleagues papers.

How can those of us without Genes memory compete? They are not perfect substitutes, but I replace
his facts with rules of thumb. The annual U.S. equity premium for 1926 to 2013 is roughly 8% and the
annual volatility is about 20%. The autocorrelations in equity returns are small and can often be
ignored. The slopes in most regressions to explain U.S. stock returns dont change a lot if we switch
from nominal to real returns, but nominal or real does matter for bonds, especially short-term bonds.
And so on. Obviously, these rules are not as good as Genes detailed knowledge, but they usually
provide the perspective I need.

Clarity, Brevity, Precision ... and No Footnotes

Mike Jensen, one of Genes earliest students, once told me, Our job is not to write papers, our job is
to get people to read papers. That summarizes Genes attitude toward writing. After hundreds, if not
thousands, of arguments with Gene about the best word and the appropriate use of a comma, I can
attest that he cares passionately about the quality of everything he writes. I can also attest that he
works hard to deliver that quality. Because even the best colleagues rarely read anything more than
once, Gene will not circulate a paper until it is as good as he can make it. As a result, most of his
papers go through at least five and sometimes more than ten full revisions before he distributes them.

Gene tries to be clear, succinct, and precise. He can usually have all three, but when there is a conflict
he sacrifices clarity and brevity for precision. His emphasis on communication affects even his
research design. When choosing between two sensible empirical tests, the easier to explain has the
inside track.

Finally, Gene rarely uses footnotes. Most are distractions that sidetrack the reader and expose a lazy
writer. If the content is important, Gene includes it in the text. If the content is not worth space in the
text, how can it justify a footnote that interrupts the readers focus and train of thought?
Collegiality Matters

I am tempted to say I have never seen Gene be rude or unkind, but I can already hear Sally saying,
Geesh French, I didnt realize youre blind. So to be precise, in over 30 years of close observation, I
recall Gene being discourteous only three times. Once a decade is a good record. (He is blunt
occasionally, but that is efficient, not rude.)

Genes behavior had a big impact on the level of collegiality at the Booth School when I was on the
faculty and I assume it still does. Given his prominence in the field and the hundreds of former
colleagues and students he has around the world, I think Genes example has also had a big impact on
the behavior of finance faculty more broadly. In other areas of economics, intellectual disagreements
often lead to personal animosity. This rarely happens in finance. Genes friendship with Dick Thaler
illustrates the point. A sociologist could probably identify many contributing factors for the cultural
norms in finance, but the example Gene sets must be important.

Genes collegiality is not an accident. Soon after we started working together, we were talking about
people the business school might hire. When I suggested one of the top researchers in finance, Gene
said hiring him would be a mistake because he does not treat his colleagues with respect. Since that
exchange, I have spent a lot of time trying to figure out what behavior contributes the most to a
productive academic environment. Ive concluded that, at least for business school faculty, Genes
behavior is a pretty good model.

No Ad Hominem Attacks

Gene once said a former colleague had won lots of arguments he should have lost. Non-academics
might be puzzled to discover that Gene meant this as strong criticism. His point was simple. Using
sarcasm or a sharp wit to undermine those who disagree with you poisons the intellectual
environment. Gene rejects all ad hominem attacks. He consistently focuses on the idea he is arguing
about, not the person he is arguing with. For example, he says a reporters question doesnt make
sense, not that the reporter is a pompous, arrogant fool.

The first time I saw Gene insulted in an academic discussionby a visiting accounting professor!I
was surprised by his response: He simply ignored the attack. Because of his prominence and
outspoken views about market efficiency and monetary policy, Gene has been the victim of many
personal attacks since then and, as far as I know, he has ignored them all. He argues that his
behavior is optimal, but doing is harder than knowing. Genes ability to consistently remain on the
intellectual high ground demonstrates remarkable emotional discipline.

Give Referees the Benefit of the Doubt

No one likes to hear that his or her child is not perfect. Most academics experience something like this
every time we get a referees report. My solution is to skim the report when it arrives and then put it
away. Twenty-four hours later I am ready to be constructive. Genes response is more mature. He
reads the report and immediately starts thinking about the most productive way to address the
referees concerns. I stopped complaining about referees mistakes a long time ago because I know
what Gene will say, Its our fault if a smart, careful reader does not understand the paper. He does
not always agree with the referee, and he will not make significant changes that reduce the quality of
the paper, but he always assumes the referee is acting in good faith and he always starts with the
presumption that the referee is right.

Gene also does not complain when there is a mistake in the editorial process and by mistake I mean
rejection. He argues it is better to move on to another journal than to make the editors difficult job
even harder. As a result, he has not appealed an editorial decision in over 50 years of rejections.

Conclusion

Gene Fama has made remarkable contributions to our understanding of finance and economics for
over 50 years, but you dont need me to tell you that. Genes insights about research and the broader
production function of academics, and his disciplined implementation of those insights are equally
remarkable. The goal of all this analysis and discipline is to maximize his contribution to the
intellectual environment of the University of Chicago while reserving the time he needs to play sports,
enjoy his grandchildren, and eat Sallys pasta. The big beneficiaries are the colleagues and students
Gene has worked with over the years, especially me.