Chapter 12 Technology in Investing

Economists and investment practitioners have been trying to make sense out of the financial markets for many years. Much of the early work, such as the dividend discount model and the Capital Asset Pricing Model (CAPM), was accomplished with little if any support from computers, and it continues to provide a foundation for current views of the world of markets. More recently, however, information technology has become an integral part of the academic study of investing, and is essential to investment managers in their analytical work and trading. In this chapter we consider a few high points of the role of technology in investment theory and practice. For readers interested in a detailed discussion of financial innovation, we recommend two authoritative books, both authored by the late market scholar Peter Bernstein: Capital Ideas,1 published in 1992 and covering the work from 1900 through the 1980s; and Capital Ideas Evolving,2 from 2007, which begins with the development of behavioral finance in the 1990s. For more general ideas on investing, we also point out Jack Treynor’s Treynor on Institutional Investing,3 and A Bibliography of Finance, edited by Richard Brealey and Helen Edwards.4

Information at Work

For much of the last century, financial analysis went begging for computational power. In Chapter 9, we noted the pioneering work in the 1930s of John Burr Williams, a Harvard-trained investment manager who devised a formula for determining ...

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