Zvi Bodie on Wisdom, Risk, and the Functions of Finance
In this deeply personal conversation, Jonathan Treussard sits down with his father-in-law and former doctoral advisor, Zvi Bodie—one of the most influential financial economists of the past half-century. Zvi traces his journey from working as a plumber's son in Brooklyn to studying under Paul Samuelson at MIT, where he met Robert C. Merton and helped pioneer modern financial economics. He shares how his doctoral work challenged conventional wisdom by proving that stocks are not a good inflation hedge and that insurance against equity losses becomes more expensive—not less—over longer time horizons, directly contradicting the "stocks for the long run" narrative.
The conversation explores Zvi's foundational contributions to lifecycle finance, functional finance (the idea that financial institutions change but core functions remain constant), and his decades-long advocacy for inflation-protected bonds. Zvi recounts the LTCM crisis from an insider's perspective, explaining how herding behavior and the illusion of invincibility led brilliant minds to spectacular failure. He discusses why defined benefit pensions disappeared, how the 401(k) revolution transferred risk to individuals who weren't prepared for it, and why he recently co-authored a new textbook with Bob Merton emphasizing option pricing as an alternative framework to traditional discounted cash flow models.
This episode offers wisdom earned over 50+ years studying risk, markets, and human behavior: save for rainy days before saving for retirement, prepare for adversity because the unexpected always happens, and never forget that teaching the next generation—whether through textbooks, I-bonds evangelism at physical therapy, or raising financially literate children—is the highest calling of someone who understands how money actually works.
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What We Cover in This Conversation
Zvi's journey from Brooklyn plumber's son to MIT doctorate under Samuelson and Merton
Why common stocks are NOT a good inflation hedge (doctoral thesis finding)
The "stocks for the long run" fallacy: insurance gets more expensive over time, not less
Functional finance: how institutions change but core financial functions remain constant
The evolution from defined benefit pensions to 401(k)s and what we lost in the transition
Why inflation-protected bonds (TIPS and I-bonds) are essential for truly risk-free saving
The LTCM crisis: herding behavior, perception of invincibility, and systemic risk
Option pricing as an alternative to discounted cash flow for valuing risky assets
The new textbook "Principles of Finance" with Bob Merton and Richard Thacker
Psychology of markets: what surprises Zvi most after 50+ years observing investor behavior
Why saving for rainy days matters more than saving for retirement when you're young
The drive to teach: from physical therapy sessions explaining I-bonds to financial literacy
Key Takeaways
Stocks are not a good inflation hedge—they're often negatively correlated with inflation. Zvi's doctoral work showed that for an investment to hedge inflation, it must be highly correlated with inflation (go up when inflation goes up). Stocks are at best uncorrelated with inflation, and historically often negatively correlated. This directly challenges the conventional wisdom that equities protect purchasing power.
The "stocks for the long run" argument is a fallacy—insurance gets MORE expensive over time. Using the Black-Scholes option pricing model, Zvi proved that if you want to insure against stocks failing to beat safe assets, the price of that insurance increases with longer time horizons. This is the opposite of what "time diversification" proponents claim. If stocks were truly safer in the long run, put option prices would decline with maturity—they don't.
Financial institutions change constantly, but core functions remain. The functional finance perspective recognizes that while structures evolve (pensions → 401(k)s, savings accounts → money market funds), the underlying functions stay constant: moving resources through time, managing risk, pooling capital. Understanding functions rather than fixating on institutions helps navigate constant change.
The unexpected always happens—prepare for adversity before optimizing for retirement. From LTCM to the financial crisis, Zvi has witnessed repeated episodes where brilliant people with sophisticated models were blindsided by the "impossible." His advice: save for rainy days first, build emergency reserves, expect the unexpected. Retirement optimization matters less if you can't survive the next crisis.
Teaching and financial literacy are the highest callings. Whether writing textbooks read by millions of MBA students, evangelizing I-bonds to physical therapists, or cultivating the next generation of financial economists, Zvi's drive comes from the satisfaction of teaching people things they didn't know. Making complex ideas accessible isn't dumbing them down—it's the hardest and most important work.
Timestamps
00:00 - Welcome and "it was not 'opposed' to be happening"
01:00 - Zvi's background: Brooklyn plumber's son to MIT doctorate
08:00 - Meeting Robert Merton and getting hooked on finance
11:00 - Doctoral work: proving stocks are NOT a good inflation hedge
15:00 - The "stocks for the long run" fallacy and put option pricing
19:00 - Inflation-protected bonds: from Israel in the 1960s to US TIPS
23:00 - Functional finance: institutions change, functions remain constant
25:00 - The death of defined benefit pensions and rise of 401(k)s
32:00 - LTCM crisis: herding, invincibility, and systemic fragility
39:00 - New textbook "Principles of Finance" with Merton and Thacker
42:00 - Option pricing as alternative to discounted cash flow valuation
43:00 - Wildest market psychology: herding behavior and perception of invincibility
45:00 - Advice to 20-year-old self: save for rainy days first
48:00 - The drive to teach and commitment to financial literacy
50:00 - Rapid-fire questions: health, anxiety, aspirin, hydrangeas
About Zvi Bodie
Zvi Bodie is Professor Emeritus of Finance and Economics at Boston University School of Management, where he taught for over four decades. He earned his Ph.D. in Economics from MIT, studying under Paul Samuelson and with Robert C. Merton, and became one of the most influential financial economists of his generation. His doctoral work challenged conventional wisdom by proving that stocks are not effective inflation hedges and that the "stocks for the long run" argument contradicts option pricing theory—findings that remain controversial and important today. Zvi co-authored the pioneering textbook Investments (with Kane and Marcus), which has educated MBA students worldwide, and recently published Principles of Finance with Bob Merton. He helped develop the functional finance perspective, championed inflation-protected bonds (becoming known as "Zvi I-bond"), and applied option pricing theory to lifecycle investing and human capital management. Beyond academic contributions, Zvi has dedicated his career to making complex financial concepts accessible, writing popular books like Worry-Free Investing and advocating tirelessly for financial literacy. His work bridges rigorous theory with practical application, always asking: how can financial science actually improve people's lives?
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Disclaimer
The content of "Treussard Talks" is for informational and educational purposes only and should not be considered financial advice. The views expressed are those of the host and guests and do not necessarily reflect the opinions of Treussard Capital Management or its affiliates. Consult your own financial advisor before making any investment decisions. For full disclosures, visit treussard.com.