Click here to access this week's Big Saturday Interview with Eric Falkenstein, author of Finding Alpha: The Search for Alpha When Risk and Return Break Down (Wiley Finance).
What is alpha really? And what does the true relationship between risk and reward tell us about the endless quest for alpha waged by investors and traders the world over. In Part 2 of our conversation with economist and author Eric Falkenstein, we learn that alpha, at its root, is all about comparative advantage - something that traders are better off trying to find in themselves than they are trying to get someone else to, in Falkenstein's words "give it to them."
Says Eric: "Alpha (does not) exist independently. Alpha exists in you. It's about self-discovery more than it is about figuring out about an asset class."
From his analysis of risk - based in part on a distinction between an economics of "envy" and an economics of "greed" - Eric Falkenstein helps traders look at both risk and performance in a different, more accurate light that is truer to our real intentions and goals in the market than many other common method of measuring risk and assessing achievement. Fully accepting the controversial nature of his insights, Eric Falkenstein notes that his message may be better received by individual investors than by institutions and academics who tend to be more willing to remain with outmoded models.
Adds Eric: "I think over time people learn. Look at index funds. It took 30 years for index funds to capture 20% of the market."
(Be sure to also check out part 1 of our conversation with Eric Falkenstein.)
