by Tim Price
“Suffice it to say that volatility and risk are not the same thing, but that for reasons which remain obscure most of the investment world chooses to treat them as if they are. The only one that makes any sense at all is that the mathematicians who came to dominate the financial world from the 1950s onwards were desperate for something they could calculate, and the variance of past periodic returns seemed like the best candidate.” – Guy Fraser-Sampson, ‘Intelligent Investing’
Some people in finance have a sniffy attitude towards academics, writes Buttonwood in the latest Economist magazine. For good reasons, we might add. (Why are academics so bitchy? Because the stakes are so low. And as Jerry Pournelle observed, you won’t learn much about capitalism at university, and you shouldn’t expect to. Capitalism is a matter of risks and rewards, and a tenured professor doesn’t have much to do with either.) So far, academia’s biggest contributions to finance have been Modern Portfolio Theory, the Capital Asset Pricing Model (CAPM) and the Efficient Market Hypothesis. With contributions like that, who needs asinine overly simplified wrong models?