Are financial theories useless & dangerous?
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» State governments better than Centre on fiscal front
» The secret why Goldman Sachs is always right
» Why are so many flats lying vacant in Maharashtra?
» Will the US manufacturing industry revive?
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Take for instance the ongoing economic and financial crises that kicked off with the bursting of the US housing bubble in 2007. It was more than just a consequence of the greed and ignorance of investment bankers and policymakers. It was a blatant expose of the several flaws in the theories of modern finance. Who would be a better person to point this out other than Mr Nassim Taleb, himself a professor of risk engineering and author of the highly acclaimed book Black Swan?
According to him, highly sophisticated and complex financial models are useless in predicting rare but highly impactful events. In fact, they are extremely dangerous. He gives a very interesting analogy to explain his point. Say you are a passenger on an airplane. The pilot comes up to you and says that his map is a bit faulty. But that is the best map available. Would you still want to take a ride on such an airplane? Certainly not! Unfortunately, the financial world often rides on half-cooked theories.
Whether risk managers, investment bankers and finance professors will learn their lessons is a different thing. But any such crisis is a great opportunity for investors to learn some very important lessons. One, it is always best to keep things simple. Using complex tools to understand complex phenomena is often not the right way to take. That is why we strongly believe in the value investing approach propagated by Warren Buffett, Benjamin Graham, Peter Lynch and the likes. Because of its simplicity yet firm adherence to solid principles, it eliminates several risks that a complex approach would fail to account for.
Do you think value investing is the most durable approach to investing? Share your comments with us or post your views on Facebook page / Google+ page.
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Chart of the day | |
Data source: Mint
*as a percentage of gross state domestic product (GSDP) |
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In order to reduce the burden on itself, the government over the long term has invited private players to enter the space of public services - education, security and healthcare to name a few. Overtime, the cost of acquiring such services has gone up. And with the same happening, the burden on the weaker section of the economy has increased. The author of the article has compared India to the developed world. But the key difference here is that the discussion for the latter has been done in hindsight. Considering that India is relatively still in the initial phase of a market based society, certain measures can be taken to alleviate the issues from a long term perspective.
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Investing mantra |
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2 Responses to "Are financial theories useless & dangerous?"
Jeevan Shetty
Apr 9, 2012Value engineering no doubt is simple, reliable and easy to understand. Consequence of error normally will not lead to disastrous consequence. However often value engineering overlook one important aspect of 'pedigree'. It's very important who is controlling the business and what is the historical background and past behavior of the individual or group controlling the enterprise. Very often the goals and the objectives of the promoters are not exactly the same as of minority share holders. Example during the sixties and seventies many of the family controlled companies managed to keep their book profits low. Some even showed losses. Still no body wanted to sell their business. It no secret that why a promoter should continue to run a loss making enterprise. This behavior changed after the pioneering business model shown by promoters of Infosys.
To conclude value engineering should be complimented by other factors like business risks from environment, health and safety for long term success of the business.
SHARAD J. MANJREKAR
Apr 10, 2012Yes certianly financial theories are useless and dagerous.