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Putting a Price on Popularity

A new model bridges classical and behavioral finance.

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Roger Ibbotson and a trio of leading Morningstar researchers recently published Popularity: A Bridge Between Classical and Behavioral Finance. It’s an ambitious effort, checking in at 140 pages and presenting a new view of how assets are priced. The popularity approach incorporates some aspects of William Sharpe’s capital asset pricing model and the various empirical premiums that have been discovered in the literature, but it extends that work in new directions. It also differs from most of its predecessors by offering a single, cohesive explanation for the market’s behavior.

Ibbotson is professor in the practice emeritus of finance at the Yale School of Management. He is also chairman and CIO of Zebra Capital Management and founder of Ibbotson Associates, now a Morningstar company. His co-authors are Thomas Idzorek, CFA, chief investment officer, retirement, with Morningstar Investment Management; Paul D. Kaplan, Ph.D., CFA, director of research with Morningstar Canada; and James X. Xiong, Ph.D., CFA, head of scientific investment management research with Morningstar Investment Management. They recently joined me to discuss their effort and its applications. Our conversation has been edited for length and clarity.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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