Andrei Shleifer

Key Takeaways

• Andrei Shleifer is a Harvard professor specializing in financial and behavioral economics.
• He challenges the efficient markets hypothesis, highlighting cognitive biases in financial markets.
• Shleifer's research connects legal institutions to financial development, emphasizing legal system origins.
• He advised the Russian government on economic reforms, resulting in a conflict of interest scandal.
• His work suggests rapid industry price increases often signal a potential crash, not sustained low returns.

Who Is Andrei Shleifer?

Andrei Shleifer is a Harvard University professor whose work spans behavioral finance, development economics, and research that challenges the efficient market hypothesis.

A recipient of the John Bates Clark Medal, he has shaped thinking on how legal systems influence financial markets and long-run economic development. He also served as an adviser during Russia's post-Soviet economic reform efforts, bringing his academic work into real policy settings.

Investopedia / Julie Bang

Andrei Shleifer's Academic and Professional Journey

Dr. Shleifer, born in Russia in 1961, earned an undergraduate degree from Harvard and a Ph.D. from MIT. After teaching stints at Princeton and University of Chicago, he became part of the Harvard faculty. In 1991 he took an advisory role with the Russian government, helping to lead the country's economic reform after the collapse of the Soviet Union. At the same time, Harvard was sought out by the U.S. government to advise the Russian government. Shleifer's involvement with both Harvard and the Russian government culminated many years later in a conflict of interest scandal involving personal gains from investments in Russian securities. After an investigation, both Harvard and Shleifer were forced to pay fines in 2005 to bring the matter to an end. He lost his honorary title at Harvard but retained his tenure.

Key Contributions to Economics

Dr. Shleifer is a prolific researcher and writer. He is most noted for his contributions to financial economics and development economics.

Innovations in Financial Economics and Behavioral Finance

Shleifer’s work in financial economics focuses on the field of behavioral finance, exploring the ways in which cognitive bias and other behavioral effects impact financial market structure, performance, and returns on investments. He is a critic of the efficient markets hypothesis, arguing that the available evidence overwhelmingly contradicts the assumptions of rationality and rapid arbitrage in financial markets. Shleifer teaches and writes that in actual financial markets, investors and financial traders are less than fully rational and are limited by risk aversion, short time horizons, and agency problems.

Shleifer has written numerous articles and books modeling the implications of behavioral finance. Investopedia readers of this entry will be interested in a recent paper, "Bubbles for Fama," which he co-authored with Robin Greenwood and Yang You.1 Based on almost 90 years of U.S. industry asset return data and 30 years of international data, Shleifer and his co-researchers conclude that Eugene Fama is "correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward," but that "such sharp price increases predict a substantially heightened probability of a crash..." These conclusions, particularly the latter one, can be useful over and over to investors who are inclined to bubble-watching and market-timing.

Influence on Development Economics and Legal Systems

Shleifer’s work in development economics emphasizes the quality of legal institutions as a determining factor in financial and economic development across countries. In particular, he has argued that the historical origin of a country’s legal system in either common law or civil law is crucial in the kind of investor property rights, financial regulation, and general government efficiency that exist today. Along with his colleagues in the field, Shleifer’s research has shown that countries whose legal systems are based on common law display better investor protection, lighter government economic intervention, and more independent courts and judiciaries, and that these are in turn associated with more secure property rights, better contract enforcement, improved financial development, less corruption, better functioning labor markets, and smaller unofficial economies.