Is financial innovation really technology? Robert Shiller suggests that financial invention is our best tool for improving our economy to build The Good Society. Do you agree? Isn't financial innovation just a euphonism for fancy ways in which bankers and other finance people swindle us out of our money?
Was the invention of the limited liability corporation a financial innovation? Is a corporation technology? Are all technologies subject to occasional failures? Why do we consider financial failures more malicious than say airline failures or railroad failures or even bugs in computer software? How can we mitigate the impact of the inevitable blowups when financial inventions fail? Was the recent financial crises that began in 2007 caused by unanticipated side effects from financial inventions?
These questions are inspired by the third video in 2013 Nobel Laureate Robert Shiller's exquisite free on-line course ECON 252: Financial Markets (2011) at Open Yale Courses (YouTube Playlist for Financial Markets (2011)).
This discussion will be based on the third video in the ECON 252 course: Technology and Invention in Finance. Shiller's theory of financial technology is based on the fundamental concept of Risk (the second video in the course), so I recommend that video as background. In addition, we can discuss portfolio diversification (the fourth video in the course) as a case study in financial innovation. Here are some notes on these videos and links to them:
• Main video: Technology and Invention in Finance. This video surveys the history of financial invention and argues that it is an important force in the global economy. Here are my extensive notes on the video on financial technology.
• Background video: Risk. This video provides the conceptual and mathematical basis for Shiller's theory of technology and invention in finance. If you are not familiar with the basic mathematics of finance, this video provides a gentle (but math intensive) and philosophical overview. You will probably understand the main video much better if you watch this video first. Here are my extensive notes on the video on risk.
• Case study in financial technology: Portfolio Diversification. In this video Shiller explains the cornerstone of modern financial theory, the various theories and technologies of portfolio diversification. Here are my extensive notes on portfolio diversification.
• To supplement the videos, I recommend Shiller's book "Finance and the Good Society". Follow this link to the New York Times' book review of "Finance and the Good Society". The book is a conversation starter and as such is full of ideas with which you are expected to grapple and (usually) disagree. As such it will stimulate a lot of good discussions. For the topic of financial invention, I recommend reading Chapters 10 (Lawyers and Financial Advisers) and 24 (Some Unfortunate Incentives to Sleaziness Inherent in Finance).
Note: On February 17th, Robert Shiller will start his course Financial Markets on the Coursera Platform. I prefer archived, at-your-own-pace courses and will only dabble a little in the Coursera edition of the course. But if you are interested in the material and want to go into it in more depth and if your schedule and mental state enjoy the excitement and community of deadline-driven courses, it will be a great experience, I'm sure.
Note: I am tentatively planning to run a series of discussions on the 2011 ECON 252 course with Shiller's book as an important supplement. I watched the 2008 edition of the course in[masked] and identified Shiller and his course as important. I am looking forward to going into the subject in more depth, taking notes, and leading discussions on each of the fundamental topics which the course addresses. This is one of a handfull of free on-line courses with which everyone ought to be familiar: it is of profound importance to our everyday lives and the future of civilization! I look forward to engaging it with the Greater Philadelphia Thinking Society.
Here are links to the previous discussions on Robert Shiller's "Financial Markets" course that I have organized:
• Financial Markets, Risks, & Crises (8 Dec 2013)
• Financial Markets, Risks, & Crises -- Repeat (21 Dec 2013)