Before he earned his PhD in finance, David McLean worked for a year as a stockbroker. Looking back, he says it was an eye-opening experience. “It’s really easy to trick yourself into thinking you know things that you don’t,” McLean observes. “As an example, when I began investing, I thought that I could pick the best individual stocks and mutual funds, but I really couldn’t.”
McLean is far from alone in making these kinds of mistakes; indeed, it is perfectly natural for investors to fall into such traps. The study of these types of phenomena and their effects on financial markets fall under the umbrella of behavioral finance, which comprises a large part of the research conducted by McLean, who was named Keeley Chair in Investment Management at DePaul last July.
McLean seeks to educate students about common behavioral misperceptions and other aspects of investing by focusing on the real-world application of various economic frameworks. Among the most useful example for students, he says, is the wisdom of a diversified investment portfolio. “We can show that investments based on large, diversified portfolios tend to yield similar returns, but have much less risk as compared to those with just a few individual stocks.”
McLean believes that bringing his research into the classroom enables him to deliver richer discussions while also giving students the tools to make good financial decisions. “For example,” he says, “one topic we address is efficient markets, a theory that says that stock prices correctly tell you a company’s value because prices reflect and incorporate all the relevant information available. We then explore examples from behavioral finance, which suggest that, in reality, investors make all sorts of mistakes that can lead to prices that are quite different from fundamental or fair values.”
Whatever the topic, McLean’s first question for any research he approaches is simple: “Would other academics working in this area think that my findings are novel and important?” Nonetheless, McLean concedes, “I don’t choose research topics with a practical application in mind, but if someone can apply my research in a useful way, that’s great.” McLean does consulting that is based on his research on equity investments, and he has presented his research at several practitioner-sponsored conferences.
“I believe that the academic’s role is to create knowledge through research and share knowledge by teaching.”
“We’re supposed to gain a better understanding of how the world works, and then teach other people what we have learned.”