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Technology and Invention in Finance

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)

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  • Lynn

    Good times

    February 17, 2014

  • Will B.

    Very good discussion and exchange of ideas. C.J. kept the conversation going and facilitated everyone having a chance for input. Excellent!!

    February 17, 2014

  • Elaine

    I enjoyed today's meeting and was sorry to have to leave at 12:30. Especially interesting was learning how people can 'invest' in social solutions that if successful & saves the government money, can earn a return for the investors. Tell me more?

    1 · February 16, 2014

  • John S. J.

    New project being launched by on March 11, I promised links:

    Great meeting today, glad I came.


    1 · February 16, 2014

  • j a

    Pretty good conversation

    1 · February 16, 2014

  • Gerry E.

    Excellent. C.J. was well prepared and vigorous enlightened discussion ensued.

    1 · February 16, 2014

  • CJ F.

    Bonus video: In this 10 minute video, Toby Eccles of Social Finance describes a new financial innovation known as the "Social Impact Bond":

    Is a "Social Impact Bond" the kind of novel financial technology that Shiller lauds in his videos? Is this the kind of innovation that society needs to eliminate social problems such as prison recidivism and economic inequality (see Shiller's book "Finance and the Good Society" pp. 192-5 where he talks about inequality insurance and the estate tax)? Do we need more cutting edge financial innovations of the type that Shiller and Eccles talk about to build The Good Society?

    One issue with Eccles' approach, is that it depends on socially-motivated investors. Is his plan a voluntary "tax" on those investors through the innovative technology of socially-oriented capitalism. That sounds paradoxical! Or is it the cutting and incisive way to finance The Good Society through business?

    1 · February 15, 2014

  • John S. J.

    Compound interest coffeetable story and quiz: Suppose you borrow a million dollars at 100% annual interest, repayable whenever. At one year you repay a million dollars, so then you still owe a million. If you do this for 20 years, you will still owe $1,000,000.

    Obviously that isn't good, so you decide to repay a million dollars plus some additional amount every year for those 20 years, so that at the end of those 20 years you will owe zero.

    What is that additional amount by which you must increase your million dollar payment every year, to have the debt paid off in 20 years?

    1 · February 15, 2014

  • CJ F.

    The main video for Sunday's discussion on "Technology and Invention in Finance" is at

    Shiller makes a compelling case that limited liability corporations, Township & Village Enterprises (TVE) in China, inflation indexed instruments, and swaps are important financial innovations. They provide tools to achieve our goals by better managing the inherent risks in life. If so, the way to achieve The Good Society may be by further financial innovation. What kind of innovations do we need? How can we help?

    In other technological endeavors, experimentation is heralded to prove out new ideas. But many assume financial innovation is cynically designed to help the rich get richer and related forms of malfeasance. Bernie Madoff proves their case. How do we ensure we are experimenting to build The Good Society and not just trying to get rich?

    Given the mathematical sophistication of financial theory, can ordinary people ever trust it?

    February 14, 2014

    • Lynn

      "Given the mathematical sophistication of financial theory, can ordinary people ever trust it?"

      What I find more worrisome is the dependence of mainstream financial (and economic) models on problematic notions of (hyper)rationality and equilibrium.

      February 15, 2014

  • MaryLynn

    I must apologize that cannot attend on Saturday. I'm sick! I do look forward for another opportunity in the future!

    February 14, 2014

  • CJ F.

    Shiller's lecture 4 on "Portfolio Diversification" will enrich our discussion on "Technology and Invention in Finance":

    I wrote extensive notes about "Portfolio Diversification" here:

    Is it surprising that the mathematics of portfolio diversification was only invented in 1952? Why don't major government banks use the theory? Do you trust this risk v. return idea? Does this imply that CAPM (capital asset pricing model) and the mean-variance portfolio analysis of Harry Markowitz are impractical? Why? Where does the theory fail?

    Are financial models like these "financial technology"? Is math a technology? Does a financial contract turn math into technology? Is financial technology patentable?

    Most importantly, how can we structure financial technology to build The Good Society?

    You can watch the video on YouTube at

    February 13, 2014

  • CJ F.

    Robert Shiller's video on "Technology and Invention in Finance" ( suggests some interesting questions.

    Shiller argues that since many financial instruments did not exist before 1970, finance is a rapidly developing field of modern technology. Do you agree? Is finance a technology?

    Since failure is normal in all technology (see my essay at, we can expect financial technology to "blow-up" from time-to-time. Was the financial crisis that began in 2007 the result of such a blow up?

    Can we make financial technology less dangerous? Diligent effort and years of continuous redesign and analysis are needed to produce safer and more effective solutions for widely deployed technologies. Can lessons from steam boilers, airplanes, aluminum beverage containers, etc help us engineer safer finance?

    Can financial innovation help us build The Good Society? How?

    February 12, 2014

  • CJ F.

    This Sunday's discussion on "Technology and Invention in Finance" will explore the ideas in Nobel Laureate Robert Shiller's video

    I wrote extensive notes about that video at

    If the first 14 minutes of that video (which reviews the concept of risk) are too technical for you, I recommend watching Shiller's video on "Risk" which provides a more in depth overview of the fundamentals of finance. Here is the link to Shiller's video on "Risk":

    Here are my extensive notes on Shiller's video on "Risk":

    If you prefer watching the videos on YouTube, here are those links:
    1) The main video on "Technology and Invention in Finance":
    2) The background video on "Risk":

    February 11, 2014

  • CJ F.

    This Sunday, we will discuss "Technology and Invention in Finance". The video by Nobel Laureate Robert Shiller that inspired the topic is an hour and a quarter long:

    You may find that this background video on "Risk" is important to fully appreciate Shiller's vision of financial innovation:

    To supplement the videos, I recommend reading two chapters in Shiller's book "Finance and the Good Society": chapter 10 (Lawyers and Financial Advisers) and chapter 24 (Some Unfortunate Incentives to Sleaziness Inherent in Finance).

    Watching the videos and reading the book chapters are optional.

    Watch the main video for the discussion:

    Watch the background video on "Risk":

    February 10, 2014

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