Charlie Munger met his match in Lynn Stout.
Mr. Munger, Warren Buffett’s best friend since 1959, is a notoriously fierce debater who does not suffer fools gladly. At a symposium on The Essays of Warren Buffett I hosted in 1996 at Cardozo Law School, I had him chair the panel on corporate finance. He lit into most members, trenchantly explaining why much of modern finance theory is”gibberish” and “twaddle.” Panelist Professor Robert Hamilton (U. Texas) commented to me he’d never seen anyone so “scary smart” as Munger.
Lynn Stout, who this week passed away at age 60, was on that panel, and she engaged Munger astutely. An independent thinker, Professor Stout mastered all the doctrinal, technical, and theoretical tricks of the trade, from classical economics to boardroom battles, and staked out her own ground on how corporations and markets work and what corporate law should do about it. She was, as Joan Heminway notes in tribute, both persistent and generous.
On the Munger finance panel, Professor Stout presented her paper, How Efficient Markets Undervalue Stocks: CAPM and ECMH Under Conditions of Uncertainty and Disagreement. In the course of discussion, she also touched on takeover premiums. Professor Stout stressed economic theory throughout her analysis and offered to update some prevailing economic models. Munger pressed on psychological aspects of the puzzle of market mispricing.
Intellectual fireworks flew, with bantering between not only Professor Stout and Mr. Munger, but other panelists, including Professors William Bratton (now at Penn) and William Klein (UCLA), and many other conference goers, including Professors Jeff Gordon (Columbia), Dale Oesterle (now at Ohio State) and Edmund Kitch (Virginia), as well as a young man named Bill Ackman.
Highlighted below is a portion of the colloquy, by turns witty and profound, deep but fun. (There’s one somewhat technical exchange between Professors Oesterle and Stout that may seem arcane but non-experts can skim it and get the gist of the intellectual joust.) Read it for Lynn.
MUNGER: Lynn, what is your personal opinion of those people who would expect inefficiencies–mispricing–to occur because of certain standard cognitive defects of humankind?
STOUT: They’re right.
MUNGER: I certainly agree with that and that means you have to listen to psychologists if you want to predict standard patterns of irrationality, doesn’t it? Read More