Sunday, October 17, 2010

The other side of the coin - A finance student's perspective on b-schools and the importance of diversity of thought

“It’s better to be roughly correct, than to be precisely wrong” – J.M. Keynes

For ages, our teachers have cajoled us to challenge the accepted notions of reality, while being careful not to re-invent the wheel in the process. Out-of-the-box thinking has forever been glorified, while we fail to think well within it.

Though this note is written from the context of a finance student, the learnings are applicable to all. Rationality and scientific reasoning is propagated as the be-all-and-end-all in our schools, while simple logic is often ignored in the awe of mathematical and so-called scientific models. Every student of modern corporate finance learns to understand and apply the concepts of risk and reward to investments, but one never stops to question the validity of these mathematical measurements of irrational behavior. The importance of a course such as BFBV (behavioral finance and business valuation, taught by Professor Sanjay Bakshi), was truly brought to the fore today, as the very concepts of modern corporate finance, such as the EMH, Sharpe Ratio and the CAPM model, were challenged and proven to be incorrect not by mathematical proof, but by appealing to simple logic. The idea is not to disrupt the confidence of students who've understood modern corporate finance as the be-all-end-all of everything to do with the function. The idea then, is to expose them to alternative ideas, and force them to think, and take a call on what's right. We often pride ourselves as rationalists, and yet tend to oversee the simplest logical flaws around us. Every idea propagated in the BFBV course makes one sit up in awe, as cognitive dissonance hits the mind, and ideas stir the very foundations on which our past education has been based. This again, points to the importance of having a dichotomy in terms of thought, wherein one part of the mind is pulled in to the lure of mathematical interpretations of finance, while the other part develops the mindset of a true investor. Understanding the views of investment greats such as Benjamin Graham, Warren Buffet and Charlie Munger, the BFBV student learns that the accepted notion of indexing, and the inability of a normal investor to beat the market should have been challenged even by the average student of finance. As the investment community genuflected to Nobel Laureates propagating rational models to explain irrational behaviour, simplistic thinking questioned why a rational investor would participate in a market which is unable to fetch him above average returns in any case! The BFBV course then, is important not just because of the ideas that one is exposed to, but also the mindset that one develops in the process. I guess it’d be just right to end this note with a thought from today’s class –

What you really want in a course on investing is how to value a business. That’s what the game is about. – Warren E. Buffet.


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