The Paradox of Financial Research: Why Smart People Disagree
In theory, financial research should bring us closer to the truth. With the help of statistics, historical data, and peer review, we might expect the academic consensus to converge around a clearly optimal way to invest. Yet the opposite often feels true: the more you read, the less certain you become. For every compelling study supporting one approach, there seems to be another—equally rigorous—challenging it. Highly intelligent, empirically-minded researchers routinely draw different conclusions. This is the paradox of financial research: it sharpens our tools but rarely offers definitive answers.
The Limits of Conviction
In the hard sciences, disagreement often stems from insufficient data or experimental design. In finance, the problem is deeper. Markets are social systems. They evolve in response to their own participants. A strategy that works well in one era may falter in the next, not because it was flawed, but because it became crowded, regulated, or arbitraged away.
Even under idealised assumptions, the ‘optimal’ portfolio depends on factors that are hard to observe or predict: expected returns, volatilities, correlations, investor preferences, and time horizons. As a result, different researchers—even those who agree on the data—may reasonably disagree on the conclusions or how they come to similar conclusions.
Take, for example, the debate over market efficiency. Eugene Fama and Kenneth French argue that the market is broadly efficient, with anomalies (such as the value or momentum premia) reflecting compensation for risk (Fama and French 1993). Others, like Robert Shiller, point to persistent mispricings and irrational behaviour as evidence of inefficiency (Shiller 2003). Both parties have vastly different perspectives that are both grounded in decades of research and Nobel-level insight.
Interestingly though, they both agree that low-cost index funds make sense, although for very different reasons. Indeed, Fama and French argue that prices are largely accurate in the long-run and it would be foolish to try to outsmart the market. Shiller argues that most investors are prone to behavioural mistakes that, ironically—given his views around market inefficiency—makes indexing behaviourally robust.
However, not all researchers come to the same conclusion despite favouring differing theories. Indeed, Andrew Chen has called into question the very existence of factor premia altogether.
Is There a Right Answer?
The desire to find ‘the best’ strategy—one that maximises return for a given level of risk—is natural. But in practice, optimality is more elusive than we would like to admit. Different asset pricing models (CAPM, Fama-French, APT, ICAPM) make different assumptions. Different investors face different constraints. Different time periods produce different winners.
Even within a broadly evidence-based framework, reasonable disagreement persists. Should we tilt towards small and value stocks, and if so, by how much? Should we hedge currency risk in international bonds? Should we use global market cap weights, or favour home bias for tax and behavioural reasons? Intelligent researchers and practitioners give different answers—not because one is right and the other wrong, but because reality is messy, and no model captures it all.
Evidence Isn’t Enough—You Need Belief
Given this complexity, it is difficult—perhaps impossible—to have 100% conviction in any particular investment strategy. There will always be papers, simulations, or regimes that cast doubt on your chosen approach. The question is not whether a strategy is perfect, but whether it is good enough and whether you can stick with it.
This is where the behavioural side of investing becomes critical. A well-structured plan that you can implement consistently and hold onto during periods of underperformance will usually outperform a theoretically superior one that you abandon halfway through. As Cliff Asness puts it, ‘What you can stick with is a huge part of what works’ (Asness 2020).
Intellectual Humility in Practice
So how do we navigate a world of competing theories, smart disagreement, and imperfect information?
Acknowledge uncertainty. The presence of disagreement—even among the best minds—should foster humility, not paralysis.
Adopt a process, not a prediction. Instead of trying to time strategies or switch based on recent research, commit to a disciplined process that reflects your philosophy and goals.
Diversify your bets. When in doubt, diversify—not just across asset classes, but across ideas and sources of return.
Embrace simplicity where possible. Complexity often appeals to the intellect but hinders implementation. A simple, robust plan may outperform a complex but fragile one.
Conclusion: Be Consistently Good, Not Occasionally Brilliant
In investing, as in much of life, perfect can be the enemy of good. The academic literature can inform and improve your process—but it will rarely hand you certainty. At some point, you must make peace with imperfection, choose an approach grounded in evidence and aligned with your values, and stick with it through thick and thin.
Conviction is not born from a lack of doubt. It is the decision to act, in spite of doubt, with discipline and humility.
References
Asness, Cliff. 2020. ‘My Factors Are Getting Killed. Now What?’ AQR Blog.
Fama, Eugene F., and Kenneth R. French. 1993. ‘Common Risk Factors in the Returns on Stocks and Bonds.’ Journal of Financial Economics 33 (1): 3–56.
Shiller, Robert J. 2003. Irrational Exuberance. Princeton: Princeton University Press.
Shiller, Robert J. 2012. Finance and the Good Society. Princeton: Princeton University Press.