Montag, Dezember 15, 2008


This has to hurt, especially if you are an academic economist.

The author is right. The academic world has abysmally failed in its obligations to its own discipline, the obligation to be rigorous and to be critical.

Too many professors are desperately afraid, after having taught financial nonsense for decades, that they will be found out and duly laughed out of town, as it were, on a rail.

Pablo Triana is right: there is no debate here with people actually interested in debate, but rather ruthless self-preservation at the deliberate cost of debate.

Just because one can create extraordinarily complex ways of calculating risk and how to insure against it doesn't mean that one should do so: the attempt to remove risk from business is inevitably condemned to fail.

Why? Because you really can't know what is going to happen in the future. Someone investing money today can't insure against unknown and unknowable risks, but can do one thing only: try to understand what they are doing when they invest, and understanding that risk is always, always, always there. Not necessarily in the ways that one expects, not necessarily in the ways that one can understand, but it is always there. Investing is always a risky business.

And believing that you can remove risk by complex financial calculations and the resulting financial instruments based upon these is something that is extremely appealing, especially for academics (it's elegant and it's the stuff that careers are built upon): it is, however, like all ideas that contradict empirical reality, a dangerous chimera, one that leads down the path of destruction.

Risk, you see, is always there: it can be quantified - that's something I do day in, day out - but it can never be removed or otherwise compensated for. Businesses that are risky aren't risky for one simple reason, but invariably a collection of reasons that may be tied together, but whose complexity requires experts to understand and quantify: there is no magic bullet that allows you to buy insurance (or if there were, the price should be so high that it effectively makes investing in such entities non-profitable for most investors.

But rather than teaching this - that risk is quantifiable, bears a cost and there is no insurance against it - the academics have taught their own ideal worlds where risk can be canceled out of the equation without making investments unattractive, and if you work things right, you might even make money whilst doing so.

I fear that I must take Pablo Triana's concept one step further: it's not merely a stifling of debate, but more importantly a stifling of critical thought, truly critical and not the dogma that passes for critical thought today. It's not so much that reality intrudes, but even worse: it yammers for attention and demands to be listened to.

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