The trading floor of the New York Stock Exchange in 1966 depicted a world driven by intuition, where the pursuit of financial gain was often an art form rather than a science. Professionals meticulously analyzed market signals, attempting to uncover hidden opportunities that eluded the general public. This era, characterized by a reliance on gut feelings and expert stock-picking prowess, began to undergo a profound transformation with the emergence of groundbreaking ideas from a group of economists at the University of Chicago. Their work, documented in Errol Morris’s film "Tune Out the Noise," not only redefined investment strategies but also fundamentally reshaped the global financial landscape, impacting how ordinary individuals approached their future and revolutionizing the investment industry.
The cornerstone of this paradigm shift was the efficient-market hypothesis (EMH), a theory co-pioneered by Nobel laureate Eugene Fama. The EMH posited a radical departure from conventional wisdom: that asset prices already incorporate all available information, rendering attempts to consistently "beat the market" futile. In an efficient market, price movements are driven solely by the arrival of new information, meaning that predictable patterns or undervalued assets are exceptionally rare. This suggested that success in investing was not a matter of superior intuition or skill, but rather a consequence of diversification and prudent risk management. As Fama himself stated in the film, "Markets work; prices are right." This implies that while outperforming the market consistently is improbable, achieving success can be attained by embracing the market’s inherent movements rather than fighting against them.
This theoretical revolution coincided with a technological one. The 1960s witnessed the burgeoning of computational power, providing investors with unprecedented access to historical stock prices and company data. This allowed for rigorous, data-driven analysis, gradually supplanting hunches with systematic strategies. The groundwork was thus laid for the rise of passive investing, epitomized by the index fund. While Fama’s dissertation on market efficiency was published in the 1960s, the markets were arguably less efficient then than they are today. Aaron Brask, a seasoned Wall Street professional and finance educator at the University of Florida, notes, "Markets were not that efficient when Eugene Fama wrote his dissertation on the topic in the 1960s. If they were, it would imply that Warren Buffett, Charlie Munger, Walter Schloss, Philip Fisher and Seth Klarman were all lucky. Fast forward 60 years, and we now have an incredible amount of money, brains and computing power devoted to sniffing out investment opportunities. This makes it significantly more challenging to beat the market. There is less dumb money, and markets are more efficient." This increased efficiency, driven by sophisticated algorithms and vast datasets, makes the EMH’s central tenet—that consistently outperforming the market is exceedingly difficult—even more pertinent in the contemporary financial environment.
The practical manifestation of the EMH and its emphasis on diversification arrived with the index fund. Wells Fargo launched the first index fund in 1971, followed by John Bogle, a luminary in low-cost investing, who introduced the first index mutual fund accessible to individual investors in 1976. These vehicles aimed to replicate the performance of a market index, such as the S&P 500, rather than actively seeking to outperform it. While the debate between active and passive management persists, the overwhelming evidence suggests that for the vast majority of investors, passive strategies offer a more reliable path to long-term wealth accumulation. However, Brask acknowledges that a select group of active managers, particularly value investors like Warren Buffett, can still achieve success. "Buffett and other active value investors come up with an idea of how much a stock should be worth based on its fundamentals. This figure is often referred to as a stock’s intrinsic value. Then they compare that value to its market price. In the end, their value investing equates to buying stocks for significantly less than they think they are worth. In some cases, higher quality or growing fundamentals might warrant higher valuations."
Beyond the concept of market efficiency, the Chicago School’s research underscored the critical importance of diversification. Rather than concentrating on finding a single, high-performing stock, these academics advocated for spreading investment across a broad range of assets. Their findings demonstrated that by combining the stocks of established, stable companies with those of smaller, high-growth potential firms, investors could mitigate volatility without necessarily sacrificing potential returns. This principle became the foundation of modern portfolio theory (MPT), a cornerstone of contemporary financial planning. David Booth and Rex Sinquefield, early proponents of these ideas, went on to establish Dimensional Fund Advisors (DFA), an investment firm that effectively translated the EMH into a successful business model, managing nearly $800 billion in assets today. The University of Chicago’s business school now bears Booth’s name, a testament to his enduring influence.
Errol Morris, an Oscar-winning filmmaker, navigates this complex subject matter with his characteristic subtlety in "Tune Out the Noise." While DFA is a financial backer of the film, Morris avoids overt promotionalism, instead employing a conversational style punctuated by deceptively simple questions. This approach allows the narrative of finance’s evolution from intuition to evidence-based decision-making to unfold organically. Matthew Garrott, Director of Investment Research at Fairway Wealth Management, commends the film’s focus on the human element, noting, "The film emphasised the human element. The academics interviewed were humble and relatable. It was good to see some of the giants of finance talk about their work in their own words."
A recurring theme in the documentary is the pervasive influence of randomness, or luck, in financial markets and in the lives of the individuals who shaped modern investing. The chaotic nature of markets means they are often shaped by unpredictable events rather than purely rational decisions. The convergence of brilliant minds at the University of Chicago, while fostered by its academic environment, also involved significant elements of serendipity. The establishment of the Center for Research in Security Prices (CRSP) by economist James Lorie in 1960 proved to be a pivotal moment, bringing together financial and technological advancements to create a vast repository of historical stock and bond data.
The personal journeys of key figures further illustrate the role of chance. Eugene Fama nearly missed his opportunity to study at Chicago, securing a scholarship at the last minute. Myron Scholes, another Chicago luminary and Nobel laureate, stumbled into financial data analysis in 1963 when he took a programming job with limited experience. When other programmers failed to appear, Scholes found himself assisting academics with financial research, a fortuitous turn that propelled his career. Similarly, David Booth’s path to academia was almost derailed by the Vietnam War; a deferment allowed him to pursue his PhD at Chicago. Rex Sinquefield, who also served in the army, was spared combat due to poor eyesight.
Despite the profound impact of these theories, the documentary acknowledges the unintended consequences. Critics argue that the very principles that democratized investing may have also contributed to financial excesses. The EMH, while elegant, has been accused of fostering a potentially dangerous overconfidence in market infallibility, leading some to underestimate the risks of asset bubbles and the necessity of robust regulatory oversight. A concerning contemporary critique suggests that the widespread adoption of passive investing may be undermining market efficiency itself, as fewer active participants are available to incorporate new information into prices.
Proponents, however, maintain that the core tenets of the EMH remain valid. Robert Jarrow, an advisor at SAS and Professor of Investment Management at Cornell University, asserts, "Many smart traders exist, and behavioural biases are not more or less than in the past. Hence, the impact of irrational traders on efficiency is unchanged. It can also be shown that bubbles are consistent with an efficient market." He further elaborates on the spectrum of market efficiency, stating, "There is a continuum of less efficient to more efficient. Markets with more pricing events like US large cap stocks are more efficient. The market for selling your house is much less efficient. The US stock market is not perfectly efficient, but it is efficient enough that active managers are at a significant disadvantage," echoes Garrott.
Even the mathematical models that underpin investment strategies have faced scrutiny. The Black-Scholes model, a seminal contribution by Myron Scholes, provided a sophisticated framework for risk management and portfolio diversification. While a theoretical triumph, it also became a justification for the proliferation of speculative derivative trading. These complex financial instruments, designed to hedge risk, evolved into highly leveraged bets, potentially destabilizing markets. The 2008 global financial crisis, marked by a near collapse of the banking system, serves as a stark reminder of how such instruments, coupled with a confluence of other factors, can lead to systemic instability. As one observer noted, the model became "an ingredient in a rich stew of financial irresponsibility, political ineptitude, perverse incentives, and lax regulation."
Ultimately, "Tune Out the Noise" transcends a mere financial narrative, offering a glimpse into a particular era of American self-reflection and critical inquiry, a spirit that some believe is now waning. The concept of passive investing, which entails accepting average returns, was itself a departure from the traditional "American way" of striving for exceptional individual success, as noted by Rex Sinquefield in the film. David Booth’s personal journey from shoe salesman to finance titan, marked by a desire to "feel good about myself," evokes a sense of an older America prizing diligence and modest achievement, a sentiment seemingly overshadowed by the modern allure of speculative trading and rapid wealth accumulation.
At its heart, the film delves into the complex relationship between information, efficiency, and the human struggle to discern signal from noise. The EMH is predicated on the belief that data provides an unvarnished truth. However, in an era dominated by high-frequency trading and the burgeoning capabilities of artificial intelligence, this certainty feels increasingly fragile. As markets operate at machine speed and AI systems become more sophisticated, the landscape for active management appears to be shrinking. "Tune Out the Noise" leaves viewers with a lingering question: even the most rational financial systems are built upon human assumptions, and the next significant evolution in investing might involve a rediscovery of human judgment.
