The Science Behind The Markets: Masters in Business with David Booth

Barry Ritholtz sits down with David Booth, the legendary investor and founder of Dimensional Funds, to discuss his journey from aspiring academic to pioneering quantitative investing. Booth shares insights into the evolution of financial science, the challenges of changing long-held investment beliefs, and the importance of embracing uncertainty in both life and investing.

From Academia to Applied Finance: The Birth of a New Science

David Booth's early career path seemed destined for academia, culminating in a PhD program at the University of Chicago. However, a pivotal moment in the late 1960s and early 1970s, marked by the emergence of finance as a science, shifted his trajectory. Booth explains that for something to be a science, it needs testable hypotheses. Before 1960, the necessary data to test financial theories simply didn't exist. The University of Chicago's development of the Center for Research in Security Prices (CRSP) database in the early 1960s, which started collecting data from 1926, was a game-changer. This wealth of historical data allowed Booth's mentor, Eugene Fama, to rigorously test theories, leading to his groundbreaking work on the Efficient Market Hypothesis (EMH).

Booth recalls that Fama, armed with this new data, encouraged his students to "do something with this data." This led to Fama's rapid ascent as a leading academic in finance, eventually earning him a Nobel Prize in 2013. Booth, initially pursuing a PhD, realized his passion lay in applying these new ideas rather than solely researching them. He transitioned to an MBA and eventually found himself working at Wells Fargo in San Francisco, where he would play a crucial role in the development of index funds.