Episode 310 - Professor Antoinette Schoar: Consumer Finance, Crypto, and Private Equity

28:22And what she shows is that if you look at the great financial crisis, in the run-up to the crisis, actually, the majority of American households by 2006, 2007, was becoming very nervous about house prices. And actually, when answering questions about perception of future house price growth, we're saying, this cannot go on. But there was a small subset of the population, about, I think, 15 % in her data, that became really exuberant about house prices just in 2008. And most likely, these are people who then bought. And so I think even looking at how, say, sentiment in the population is changing can help you identify when we are coming close to the peak of an exuberance cycle.

29:11We're in Canada. I mentioned that earlier. It keeps looking like we're at a peak here, but I don't know when it's going to turn around. I think everyone in Canada would love to know where the mean is. You've got a couple of great papers on financial advice. In your audit study on financial advisors, how well did they de-bias their prospective clients? We did an audit study of financial advisors in the US where we sent, in a way, mock clients, if you want, to different financial advisors. And these different clients had different portfolios that present different biases. So, for example, some of them were return chasing.

29:48Some of them were under diversified and held too much of their company stock, meaning the company where they're working, which is not good for having a very diversified portfolio location. What we saw is that financial advisors de-bias their clients when the decisions that people then would make benefit the advisors financially. So, for example, if a client holds most of the money in their own company's stock, that is bad for the client, for sure. But it's actually also something where the advisor, by helping the client, makes money. Because the advisor can tell the client, move away from that one stock, diversify and buy a mutual fund, where they then benefit from the compensation.

30:36Unfortunately, we saw that when clients have biases where the advice would go against the financial advisor's incentive, then they do not de-bias. And what do I mean with this is, say, there are some clients who think you should be chasing different industry returns or different subsets of the fund strategies. Those cost, in some sense, useful clients to financial advisors because you can rebalance their portfolio all the way and push it from one type of fund to another and each time basically get fees as an advisor. And there, unfortunately, we saw that advisors didn't give people, say, the advice to just invest in low-fee index funds because that's not so much in their own personal interest.

31:23So that suggests conflict of interest affecting the advice? Absolutely, yeah. You're saying it very eloquently. Basically, yes, it means that it affects the advice. But I do want to say, because I don't want to be bludgeoning advisors either. I mean, it is true that in situations where the advice is, you know, it doesn't lead to a conflict of interest. They did give good advice. And in a way, I would say that one of the problems actually is that we have maybe in the US in particular, too many financial advisors that actually are brokers and not fiduciary advisors. And in the U.S. at least, there's a difference that if you are a broker, you don't have a fiduciary responsibility to your clients.

32:09You just need to not defraud them, basically. It's a very minimal responsibility. While registered investment advisors who are fiduciaries, they actually need to make sure that they put you into the lowest fee funds and act in your interest. But unfortunately, in the US, less than 10 % of professionals who act as advisors are actually registered as fiduciary advisors. So in that audit study, how did the advisors line up with portfolio theory? I would say on a minimal basis, it wasn't too bad. Now, this sounds somewhat circumspect, right? But what I'm trying to say is that the majority of advisors actually did advise people to put money into mutual funds.

32:56And therefore, at least there was a minimal set of diversification of the portfolio that these advisors actually recommended. And so I would say they didn't give terrible advice. Where the problem came is more really that they were not necessarily always putting people into the type of mutual funds that have the lowest fees. And they are erring on the side of putting people into actively managed funds. And we know that actively managed funds often have very high fees without doing better than an index fund. And so this is the margin where I feel retail investors should be very vigilant, if you want, and they should understand that typically a low fee index fund is really the best allocation that they can do for themselves.

33:46How do investors' prior beliefs affect their receptiveness to receiving financial advice? That's a very good question. I would say from some of the work that we have done is that this is actually a relatively subtle answer. And the question is subtle in the following sense. You will often hear from financial advisors in the market that somehow you have to cater to people's belief. You have to basically just tell them what they want to hear. And you cannot educate people. It's a little bit condescending, but it's also very self-serving because it basically means if I give somebody somewhat suboptimal advice, it's not my fault.

34:28It's because the client wouldn't understand better. So from my research, at least, that doesn't fully line up with what we are finding. Because what we are finding is that when people have more financial literacy, when they know already some finance, they actually want to get advice that is more aligned with textbook advice, meaning they actually expect advisors to tell the clients that they need to be well diversified, minimize fees, not go into active funds. And so actually in those situations where the client has this strong price, it's when they are more sophisticated and then they're expecting better advice.

35:10However, what we find is that the type of client who has very little financial literacy, they actually are very malleable. So it's not the case that you need to cater to them much because actually whatever the advisor tells them, the client is typically willing to believe. Now, for the client, that's not so good because it means if they're getting bad advice, They are just moving into that advice as happily, if you want, or as easily as moving to the good advice. But actually, remember, the argument we started with is that you have to give the client what they want to hear. And there the argument is no, because the client doesn't know what they want to hear.

35:50They don't have much of a prior. So they're very willing to accept good advice, too. And so there's, in a way, no excuse to give these clients very biased or distorted advice. They weren't waiting for distorted advice. I do want to say one thing which is probably true and that I've heard from many advisors, and even I see this in my own students, it is true that when the market becomes very hot or when there is basically, you know, certain asset classes are very bubbly, as people like to say, but basically when there has been a run, it is true that then there is a lot of temptation for people to, in a way, follow those trends.

36:33And I think probably it is true that a good advisor who understands their clients well, does need to put a lot of effort to explain to people that now, look, these are exactly the times where being diversified and not breaking your portfolio allocation, it feels like, oh my God, I'm missing out because crypto is going through the roof. But if you go then into crypto, it will crash on you. And then hindsight is unfortunately very painful. And so I'm not trying to say that it is easy for financial advisors to explain to people what good advice is and why you have to have discipline in your portfolio.

37:12So I'm not belittling this. All I'm saying is that it's not the case that somehow, especially financially uneducated customers have crazy beliefs and cannot be persuaded of more rational financial strategies. So people with high financial literacy have a prior that high fees are bad, index funds are good. And then people with low financial literacy don't really have any priors and are receptive to advice. How does receiving advice change the priors of each group? If you take a financially literate investor who believes in index funds and put them in front of an advisor that says, no, actively managed funds are good.

37:50How does that affect their beliefs? And then likewise for people with low financial literacy? So what we found is that for the people that have high financial literacy and you tell them the opposite, they actually dislike the advice and they basically downdate on the advice and they don't change their beliefs very much. Now for the people with low financial literacy, we basically see that, yes, they react to the advice that's given and they move their priors in the direction of the advice, whether it's good advice or bad advice. So you did this experiment where people receive advice. And I think there was an activity where they had to actually choose to invest their own money and there was a prize or something, a contest.

38:34How does the advice that they received affect how they actually invest their money? So we do see that the advice that they receive affects how they invest their money. And what I mean with this is that, again, we see that financially more literate people are more likely to pick index funds and low fee funds. And financially less literate people are more likely to also pick active funds and higher fee funds. We do find then, however, that the advice people follow or change their investment behavior in response to the advice. And we think that even though people, even very financially educated people, might on paper understand that you need to be diversified, that you need to pick index funds, that you need to pick low fee funds.

39:24But when given actual funds to pick, they don't necessarily know what that means. There's a big difference between knowing that you should be well diversified and knowing how to build a truly diversified portfolio. Is it 10 stocks? Is it 50? How much do you allocate to each basically stock in the market portfolio? This is obviously in a way more difficult than just knowing the concepts. And so I think this also highlights in a way that financial education goes a long way in helping clients and average people know what to ask for from an advisor, but they still need to rely on the expertise of the financial service industry in really implementing those strategies.

40:13Yeah, it's a big insight. So people can get the general concepts and that puts them in a much better position to receive advice, but it doesn't necessarily imply that they can just go and do it themselves successfully. And why would we expect? We don't expect people to do appendicitis on themselves. We want doctors who can tell you what the right diagnosis is and then do it for you. And in a way, financial services is very similar to any type of expert service. But it does highlight how important financial literacy is for someone to be able to detect when they're getting bad or conflicted advice.

40:46Exactly. Because I think to me, this is a very important dimension that also regulation needs to be aware of, is that the market for financial advice, of course, is meant to be a private solution in a world where, yeah, financial decisions are complex. But choosing a good advisor needs already literacy. And how to pick a good advisor is in a way one of the biggest decisions that actually retail investors make. And I think in the US at least, it's often very much left to retail investors without much help. Again, because as we were discussing before, most professionals who give advice have very minimal fiduciary responsibility to their clients.

41:33How does advisor compensation affect how their advice is perceived by the consumer? What we find in our research, so in the US, there are different models of how advisors are compensated. A majority of advisors is basically compensated by fees that they're getting from the mutual fund providers to whom they allocate clients' assets. And that creates a conflict of interest, of course. Now, there are also models, for example, where advisors are paid just by time spent with a client. And then what you also find is, especially for much wealthier clients, that advisors are paid by assets under management.

42:12And then the incentives are obviously much more aligned. The issue is often that in the market for financial advice, there are lots of financial service companies that are marketing their services as saying that the financial advice is free. But it's not free because the advisors are paid by back-end fees that those mutual fund providers are providing to the advice company. And the problem is then the following. What we see in our experiment is that when customers are being told that the advisor has a compensation scheme that conflicts with their interest, they're actually reacting less to the advice.

42:58So in a way, that's very rational. They basically realize there could be a conflict, so I should take everything with a bit of a grain of salt. And if the advisor is very well aligned with the client, they're much more willing to believe it. So that's, again, great in this experimental setup. What I'm a bit worried about is that in the real world, where you have a lot of advisors who will market this service as if they were for free, many consumers might not understand that, in a way, you have to pay for advice. And therefore, an advisor that says, look, I do need to be paid, say, for the time I spent with you and for my human capital and the effort I put, then it suddenly might seem to an uninformed retail investor, wait, this guy is willing to give it to me for free and has also a lot of beautiful slides and talk and blah.

43:50And this person says, I have to be paid. And then it sounds almost like this person is taking advantage of me, even though, no, this is just the honest advisor who tells you how they are being paid. And so this leads to, potentially leads to some adverse effects of competition in this market when customers are not fully understand how actually different advisors are being compensated. Yeah, well, that's important. So consumers, given the information about how the advisor is being compensated, they'll make rational decisions and how they interpret the information, but that disclosure is not always obvious.

44:26Exactly. And I think one thing that people, I mean, I know it sounds so boring and it sounds like a boring economist, but when you are shopping for any type of financial advice, but also maybe other advice, you have to expect that the person has to be paid. Most people don't work for pro bono and for the kindness of their heart. And I know that's what I'm saying. It sounds like the horrible economist who always says that everything has to be compensated. But, you know, we all want to live and probably want to live well. And so why would advisors who have good knowledge, should they give it for free?

45:00And so I'm just saying that, therefore, customers should always think the service has to be somehow compensated. If somebody tells me it's for free, that just cannot be true. So I need to dig deeper and understand where they're getting paid. Got to follow the money. Indeed. So based on the research that you've done on financial advisors, what do you think consumers should be looking for when they seek out financial advice? I would say number one, as we just discussed, they should really understand how is the advisor compensated? What is the alignment of incentive or the conflict? And typically, it's actually great if your advisor is paid by asset under management, because then when your portfolio does well, they do better.

45:46And the more they grow your portfolio, yes, they also get more fees, but in proportion with the gains that the portfolio makes. In addition, I would say people should think about getting financial advisors whose fiduciary responsibilities are aligned with them. And of course, in different countries, I'm sorry, I don't know in Canada what the regulatory landscape is, but in different countries that means different things. But there are consumer advocacy groups. And in the US, for example, there's also Consumer Financial Protection Bureau and others where you can get good information about what are the type of compensation schemes that are available and what are the types of supervisory frameworks for financial advisors.

46:33It is similar in Canada. It's similar in Canada. Different words and different regulations, but overall a very similar setup where there are brokers who are not required to act in the best interest of consumers. And then there are specific registration categories where they are required to be fiduciaries. That's great. I want to move on cryptocurrencies, which we spoke with your co-author on some of your research on this, Igor Makarov, a while ago. You started looking at crypto, I mean, pretty early in terms of academics who are taking it seriously. What got you interested in studying cryptocurrencies?

47:04To be honest, actually my students. So what happened is that I've been working in consumer finance and in fintech and financial innovation and venture capital for a long time. And I somehow thought, oh, this crypto thing seems like this niche. This was, say, in 2012, 13. It was, to me, initially very niche. And I thought I wasn't sure where it would be going. And to be honest, I was relatively ignorant what it actually was. And I was happy in some sense to be ignorant, because then you think that, okay, I don't need to spend so much effort thinking about it. And then actually several of my students came to me and basically said, look, it's really pathetic that we are MIT and we don't have a class on the latest things in fintech and in particular cryptocurrencies.

47:54And then I thought, actually, they're right. And at the time, I was group head actually at MIT of the finance department as a department dad. And I tried to convince some of my colleagues to teach this class. And they said, no. And I thought, shoot, now I have to. And so this is my conflict of interest. So then I thought, OK, if I need to teach it, I need to really know it and I need to understand what it is. And so that's when I basically started learning much more about crypto. I also in this class, for example, I invited a bunch of people who at the time were really industry leaders in crypto.

48:30For example, the founder of Circle, Alea. At the time, Circle wasn't even a stable coin yet. They were just basically an OTC broker and we had really good discussions. But also at that time, there was very little formalized knowledge of what crypto was. And so it was to me as a financial economist, I suddenly realized, wow, this is actually a very cool space in the sense that intellectually, there's a lot going on. And in a way, there's also some reinvention of finance in that space of people who are engineers and don't know so much finance. And then when you are a financial economist, you think, I have seen this movie and I'm really scared.

49:10I see it crashing and I can tell all these people that it will crash. And of course, they will not believe me. And then you don't want to say, I told you so. But sadly, some of this actually did happen. I've seen a joke about that somewhere about how crypto speed ran all of the lessons from financial economics of the last whatever, 100 years or something. Exactly. So based on the research that you've done, and I guess the interactions you've had in that space as well, do you think that cryptocurrencies have been an overall positive innovation? I know this is a very loaded question. So I would say that on net, I still feel that cryptocurrencies are still looking for their really big hit application.

49:55I wouldn't say the same thing about blockchain. I feel blockchain as a technology for settlement of trade, maybe for even settling of international trade contracts and these type of things has already had and will probably have lots of useful applications. But cryptocurrency as a payment mechanism and as a currency, I feel indeed per se haven't had a huge breakthrough application yet. However, I do want to say the following. I feel that The fact that there has been so much talk about our payment system, about the inefficiencies of our payment system, about the pathetic fact that until recently, it took three days for a payment from a U.S.

50:46bank to another U.S. bank to settle. This is just unacceptable in the 21st century. So I'm saying all this to say that I think one, at least in the U.S., very big positive thing that maybe inadvertently came or maybe intentionally, but came from the crypto discussion is that the US has invested in many new payment realms and rails and many financial service companies, including the credit card companies and PayPal and Visa and blah, blah, blah, are now starting to think much more how to increase the efficiency, the speed, reduce the prices, and so on. And so I think that on that is very good that this has happened.

51:28Now, in a way, it's very sad that it took crypto for this to happen. I mean, it's just, come on, the technology was there before crypto, but maybe the regulatory appetite wasn't there, the urgency wasn't there. So I do actually give, in a way, the crypto discussions a lot of credit for making people much more aware of the inefficiencies of this. So it created some competition for existing payment rails. And even if crypto wasn't ultimately the answer, just the notion of potential competition made existing payment rails get more efficient. I think it also made a lot of consumers suddenly much more aware of what they were paying and not wanting to take it.

52:06How does the trading behavior of retail investors and crypto differ from their trading and other asset classes? So I would say there's a lot of interesting research that has started to look at the trading of people in crypto. And of course, there were people who very early traded in cryptocurrencies. And there were also big hedge funds and so on that initially made a lot of money through arbitrage trading. So at that time, there was still really big arbitrage opportunities. So this is now ancient history, but there used to be this, what was called the kimchi premium. So the same Bitcoin token was available to buy in South Korea, let's say, for$2 ,000 more than on US exchanges or on UK exchanges.

52:56And then, of course, especially institutional investors and hedge funds started to arbitrage these price distortions away. But actually, some early retail investors did really well in these things, too. Now, I think what over time we see has started happening is that as crypto trading has become in a way much more broadly available, there are now many more people in a way who trade on it. I would say more for the sake of risk taking than really doing any arbitrage anymore. And there, what at least our research suggests is that in crypto, the average retail investor actually is much more of a buy and hold momentum trader, while in other asset classes, say equity or commodities, they are trying to be contrarian.

53:53So the last thing I said has been shown, not just for us, by actually lots of people who have used data from Robinhood, Charles Schwab, other basically discount brokers. And what you over and over see is that in the more traditional asset classes, retail investors try to be contrarian. And basically what does this mean? That means when the price of an asset has gone up a lot, that's when they typically sell. And when it goes down a lot, they buy in. So they must have somehow a belief that the market overshoots all the time and they know better. And that's why they want to be contrarian. In fact, there's very nice research by Enriketa Ravina and her co-authors at HBS that shows that this type of contrarian trading in stock is in particular around earnings announcements.

54:42So when there is positive earnings announcements, the price goes up. Retail investors then want to trade against it. Now, what we see that those same people who trade this way in their equity and commodities in crypto, they don't do this. When the price goes up, they keep holding and they don't sell. And when this price goes down, they also actually hold and they don't either necessarily buy a lot more, but they also don't sell. And so people seem to be much more willing to, in a way, endure the market movements in their crypto trading than in anything else. What do you think explains it? Obviously, we can't.

55:22We just see people's trades. We don't look into their brains. We also didn't have a possibility to survey these retail investors. So there is work by, for example, people at Berkeley that have surveyed investors too. We think a lot of it is that the return expectations that people have in cryptocurrencies is different from other asset classes. And what I mean with this is that people somehow have this belief that in cryptocurrencies, when the price goes up, they think it's an indication that the price will keep on going up. And some of it is because maybe they have behavioral biases and they think, oh, the price can only go up.

56:02But it's not all irrational because if you think about, especially in the early days, I mean, we are still in the early days of crypto, because we all don't have a lot of cash flow information. Cryptocurrencies don't yet generate a lot of cash flows. So what do you have? You have only the price to update about the future adoption of cryptocurrencies. And what we think is going on is that what people basically want to figure out is will crypto become really big? It's already growing, but will it become really big? And what model to put on this is very complex. But when they see the price going up, they say, it means that more people are adopting crypto, more people are trading in it.

56:46Maybe it also means that regulators will look more favorable on it, that it's not going to collapse. And so, yes, if that's true, then there will be more positive network externalities and the price will keep going up. And so therefore, I think it's actually not irrational if people think that when you see an increase in the price of crypto, it might also mean that it's there to stay. And therefore, the price should be going up a bit. It's super interesting, just the behavior of people trading in stocks and crypto is different. That alone is just fascinating. You mentioned earlier being able to bring your financial economist perspective to crypto and see things before they collapse.

57:26And you wrote a paper about the Terraluna collapse. Can you talk about what caused that? What caused that? So what our research suggests is basically that this was a system that was becoming less and less sustainable. And we can go into the details why it wasn't sustainable. Basically, there was Anchor Protocol, which is something that was basically like the money market fund for crypto that was paying out more than 20 % in its deposit rate to the people who were depositing funds on this DeFi app. But they were not generating 20 % on the tokens, basically on the stablecoin USD. And so then what our research suggests is that over time, a large fraction of the participants in that system started realizing this is not sustainable.

58:22And actually that this high deposit rate was being subsidized by some of the investors, the early investors in Terra Luna and also the insiders who had made a lot of money from the hype in Terra Luna and the fact that the Luna price had gone up so much. And so then what we show looking at blockchain data from the Terra Luna blockchain is what seems to have been the case, is that there was a trickle of people starting to leave Terra and also sell UST, the stablecoin that the system had. And then what happened is that a few large investors decided to take their money off the table, so to speak. And then there was a run.

59:05But I want to be very careful because early on the run of Terra Luna, the co-founders of Terra said that, oh, you know, this was a malicious attack by some outsiders who were trying to destabilize the system, almost like a bank run. If you run on a bank that has money invested in illiquid assets that might even be very valuable, but if you force them to do a fire sale, then a bank can fail. That is even a solvent bank. This is why banking is so difficult. That's why we have the Fed and so much regulation of the banking system and so on. But what our research shows is that that doesn't seem to have been the case of Terra Luna.

59:43The problem of Terra Luna was basically that there was no seriously productive asset that they were investing in. And with time, more and more people realized, wow, this has to come to an end. And so then it was more a question of who will let the first shoe drop in a way, rather than this being a malicious attack. And then what we basically show in the research is that ultimately, it was large investors that ran first, realizing how this thing really is going down. And unfortunately, the small and poorer investors were the ones who didn't realize that even a run was already starting. So they kept buying.

1:00:26In fact, they even kept buying from the big guys who were running from the system. And they only ran much later when the price had already collapsed quite a bit. And so they lost way more money. So big informational asymmetries that affected the smaller depositors. Exactly. And the sad thing is, of course, that one of the promises of the open permissionless blockchain initially was that everyone, even small people, can see what's going on on the system. But exactly as you just said, Ben, just having the data is not knowledge. You have to have the model to understand what is going on. Is it a run?

1:01:05Is it not a run? In fact, I saw on many crypto Twitter and the chat rooms of Luna and Anchor during the run on Terra Luna, some people were saying, oh, now is the time to buy the dip. So you see, they didn't even understand this was a run. They thought, oh, now is a good time to buy into it. But that really shows you that they really didn't understand the underlying system that was being created. Crazy. You'd have to think also that with a project like that, the depositor base would be relatively undiversified just by nature of it being a crypto project, which is banking risk management 101 to not have a concentrated depositor base.

1:01:43Absolutely. And in particular, I think in Asia, in particular in South Korea, a lot of people lost a lot of money because the founders originally are from South Korea. They marketed it more strongly there. And so from everything what we studied, they are actually the welfare impact on many retail investors really was very horrible. That's terrible. What do you think the outcome of this thing suggests about the role of regulation and maybe even central banks in the financial system? In the end, there is, unfortunately, you can say, but unfortunately, financial markets will always have risk. And in particular, banking has a lot of risk because there are, as we were just saying before, banks inherently, if they do maturity transformation, meaning they invest in long assets, but give you deposits that you can withdraw whenever you want, they are inherently somewhat fragile.

1:02:42And that's why we have a regulatory system like the central banks, a lender of last resort, a deposit insurance like the FDIC to assure people that they don't need to run when they hear a crazy rumor if it is a regulated bank. So in a way, there is a reason why all these things are in place. And they do protect, in particular, retail investors. I mean, And if you think about it, people don't have time to watch their money 24-7. They have real lives to live. They have work where they have a schedule. You have to be very wealthy to just be looking at your money, to be very honest. And so I think what we have basically seen in crypto is that ultimately, all these truths that people have been studied, in a way, these repeated things that occur in financial markets also occur in crypto.

1:03:32And just the fact that something is on a blockchain or that it's outside the regulatory framework actually doesn't make it somehow better. It does not even make it more competitive. That's, I think, the shocking thing that many people don't understand. I hear this all the time from people who are in crypto that they say, but look, the one big difference is because it's an open system, it's a permissionless system, anyone can access it. Therefore, it is more competitive. But that's not true. And the reason it's not true is because financial services by their nature have massive economies of scale and scope, and they have network externalities.

1:04:17And so what does this mean? What it means is that when you're big, it gets more big in finance. Liquidity, if you think about it, is the ultimate network externality. It's basically when you are a big market, even if you charge people a lot, traders will come to you because execution is best in the liquid market. And that's why if you look even in the crypto world, Uniswap is still the biggest decentralized exchange, even though there have been many startups like SushiSwap and many others. But you can see that without any regulatory intervention, naturally that system actually became very centralized.

1:04:59And it's exactly because of, in a way, the natural law of finance that economies of scale, scope, size are working. But think about the following. When there is no regulation possible, Once a provider becomes very big, nobody is telling Uniswap, look, your fees should not exceed XYZ. And in particular, it shouldn't exceed XYZ for really small people who don't really know what they're doing. So then actually what you saw, you were exactly saying this before, really in massive fast forward, how a system that was meant to be competitive itself made itself very uncompetitive. And we see this in many of these financial applications in the crypto world.

1:05:44It happens in finance. It also happens in technology where decentralized technologies tend to centralize and crypto is getting that from both sides, from the technology side and the finance side. Another area that you've done a ton of incredible research is private equity and venture capital. For retail investors, what do you think about private equity and venture capital as an asset class? I think that for most retail investors, it's not a great idea to invest in private equity and venture capital. And the reason is that from a lot of work that has been done over the last 20 years, and I have some very old work with Steve Kaplan that we did, But what basically we see is that in venture capital and private equity, you see massive differences in the performance of funds, way more than in mutual funds or any other traded asset classes.

1:06:35And so it really matters with whom you invest. So it's not just, oh, I can build a diversified portfolio because the stakes are so big. If you are a small investor, there is no way you can be diversified. You need easily$500 million to be even close to diversified across some private equity funds. And if you really want to be in private equity ventures, the funds are a little bit smaller. But in private equity, you need even more. A retail investor cannot achieve. Now, on top of it, actually, in some more recent work that I've done with Josh Lerner, what we also saw is actually who you are matters in private equity.

1:07:17And this actually goes back even to the discussion we had about financial advisors, which is basically the best private equity and venture capital firms will charge clients based on how valuable they are to the fund. And what we have basically seen over the last decade in particular is that if you are a really big pension fund or the endowment of Yale and MIT and Harvard and so on, so you basically have a lot of money and you have some expertise and you have maybe a name brand, you get into much better funds than if you're an average person. But then we have shown that if you don't get into the best funds, actually the performance is worse than just investing in the index.

1:08:04And so that's why I think for retail investors, it left to their own effect. So just in their 401k, I don't think that's a good idea. That's brilliant. Your stuff on private equity is obviously incredible research. So you mentioned pension funds. What if we took an ultra high net worth individual investor with a big name, maybe? Does that apply to them too? So there, what we see is basically, it really matters how smart the investor is. So there are some very high net worth individuals who have a fantastic team that works with them, and they make fantastic decisions and have great returns. and then others whom maybe they don't know how to choose their own advisors or they just got unlucky, but we see a lot of differences.

1:08:51But we even see on the pension funds and on the endowments, I was just saying endowments, but the smaller endowments who don't have the money to invest in an expensive staff that can really understand private equity and venture capital well enough, they typically have bad returns in VCPE. While the pension funds and endowments that are large enough and have over time invested in a good enough staff, they are the ones who have better returns. One thing that I worry a lot, and sorry, you didn't ask this, but this is something that really keeps me up at night, is that you see the nature of private equity and venture capital and the fact that it's so illiquid means that you can hide bad returns for quite a long time.

1:09:40So for eight years or maybe even 10 years, there is no reckoning and then there are bad returns. Now, why is this particularly bad for pension funds, but also for endowments is because If you think about a university spends out of its endowment based on a rule on the endowment returns. Now, if it's a publicly traded return, if your portfolio did poorly, well, then you don't spend so much. But in VCPE, where you can pretend that, oh, we had 12 % return for 10 years, and therefore the university might overspend out of its endowment, basically what you're doing is you're beggaring future generations in order to spend today.

1:10:30Now, if today's research is brilliant and people do a great job, well, maybe that was good. But if they don't, then I think people need to understand that we are actually de facto stealing from future generation or from the young people today by pretending that we have these great returns. And the same is true for pension funds. It's basically we are giving today's pensioners way more and we're taking from the young. And I'm an old lady, so I'm not on pension yet. But really, it worries me that the more we do this, the more we're leaving the young generation to hold the bag. Holding the bag, I agree with you.

1:11:11On private market valuations, We don't touch it as a firm, so it doesn't keep me up personally per se, but I think it's pretty scary. There's an article recently in the Wall Street Journal about private market valuations and how funds acquire private assets for a steep discount to their mark, but then value them in the fund at the mark. And it looks like they just got a really big positive return, which then affects the fund's performance, which then affects investors allocating to the fund. But of course, you can't argue that's a real valuation, I don't think. I agree. That's very scary stuff.

1:11:38This is exactly, again, where because the illiquidity allows you to hide a lot, if people don't fully understand these implications, they are not aware that this is happening. So our final question for you, Antoinette, how do you define success in your life? So I would say in my professional life, I hope to, through the research that I do, to inform people so that they make better decisions for their life and that we improve how markets function, how finance functions, so that financial services really serve people rather than basically are just a way to extract rents from helpless retail investors and people in general.

1:12:21in life. I think it's more complex. You hope to be a good person to the people that you are around and have a positive impact on them. And that to me is very important, but it's an ongoing struggle, I think, for the rest of one's life. Great answer to the question. All right, Antoinette, that's our last question. This has been a great conversation. We really appreciate you coming on the podcast. Thank you very much for having me. It's been lots of fun to talk to you. Such a great conversation. Thanks, Antoinette. Thank you. Take care.

1:12:53Thank you.