When Satyajit Das started to work at a commercial bank, the world of finance was simple: banks made money by lending it. That was 44 years ago, and the tools of the trade have changed quite a bit since then. In this INET interview with Robert Johnson, Das describes some of the cultural changes that transformed the world of finance from the perspective of a practitioner and shows how traders of the "School of Hard Knocks" were replaced by a generation of traders that came straight from business school and overly relied on models and financial theory.
2) As a financial consultant, Satyajit Das told his clients: Let us know what you want to do and why you want to do it, and we can fit models and numbers around it. The models are not sacred. And investors had better pay attention to history and context, Das says.
3) Satyajit Das witnessed first-hand the transformation of the financial industry's reward system, how bonuses replaced the "golden handshake" of private partnerships. Das also saw how in the financial business deviating from the norm is dangerous, which leads to a clustering of risk. The possibilities of gaming the bonus system are huge, in particular since the advent of complex valuation techniques. If the system can be gamed, it will be gamed, Das says.
4) With mathematical finance it became possible to put a number on risk. While the quantification of risk makes life comfortable for everybody, it also compels us to stop thinking, Das warns.
5) We are reaching the end of the cycle of financialization as a growth machine. In addition, the speculation that drives food prices ultimately may lead to social unrest and the rise of political extremism, Das says.
6) In the early stages of the crisis, policymakers were terrified and therefore willing to cooperate. Now, fear is gone and national interests dominate. But it takes consensus to tackle the pressing issues of our time: the environment, limits to growth, and the pricing of risk in the financial system, Das says.
Comments
Dear Das,
This your analysis is definetely represent the phenomenon of current financial issue in which most of financial institution in th epart of the world become greedy and game areas. It is not to support economically activities only but much more also dominated for business and capital interest. It could be said that financail institution has lost their first orientation and obligation. The weak of system to be manipulated has lead the profit is not for growth anymore, however aims for 'greedy and unresponsible behaviour persons'. Thanks for sharing
Very interesting!
An important contribution to a vital debate. It does seem that somehow a group of politicians and business people discovered a formula that seemed to serve us well for decades, only to reveal its flaws. Some would have us believe that this is the best that we could hope for, that no system will be perfect and will ultimately fail. The best one can do is a form of economic survival of the least un-fit.
My problem with this view is that evolutionary theory does not guarantee the survival of any particular species, so there would - in principal - seem to be nothing to prevent the survivors being those currently on the margins of the least developed parts of the world, and hence least at risk. 'Taking us back to the stone-age.'
As a mathematician it seems to me that mathematics could provide an adequate substitute for the wiser 'grey-beards' of the past who challenged group-think, and that we seem to need to draw upon all the resources we can to keep our thinking clean. I notice that Das, like so many, seemed to confuse 'mathematical' and 'quantitative' approaches. Part of the problem, surely, was that 'mathematical finance' was narrowly quantitative. I wonder how many mathematical finance courses covered Keynes' mathematical theory of non-measureable probability and risk from his mathematical 'Treatise on Probability'? It seems to me that his subsequent work (on economics) is liable to be misunderstood if divorced from his Treatise. If there is a way-forward it surely involves distinguishing between a quantitative approach to risk (which is folly, for the reasons that Keynes' gives and Das summarises) and a 'good thinking' approach to risk 'in the round', which I suggest would be informed by and compatible with a mathematical approach to risk, such as Keynes'. Unfortunately, perhaps, Keynes' works do not give us a simple cook-book, but I do think that studying risk mathematically with economic issues in mind would give the best chance of constructing an alternative way ahead.
It is helpful to think of finance as the way in which "buyers" and "sellers" of capital resources are aligned through intermediaries and legal instruments. I differ with the view that this is a stagnant market because of the inherent "lack of fit" which the intermediaries serve to balance out between the needs of buyers and sellers. These varying profiles of cash flow timing, risk and cost will continue to drive a dynamic industry built around striving to find better ways to meet everyone's needs and resoures.
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