Claus Leggewie

The pugnacious political and cultural scientist
Interview conducted on 7 November 2017

Courage, not anger: how consultative democracy can be achieved

In 1990, political scientist Professor Claus Leggewie introduced a term into socio-political debate, ‘multikulti’, that was inspired by the title of an album by US jazz musician Don Cherry. Today, Leggewie is one of the foremost political and cultural scientists in Germany. As well as warning of the dangers of right-wing populism and climate change, he sets out ideas on how democracies can be reformed and strengthened through greater citizen engagement. Leggewie was a guest speaker at the twelfth risk management conference in November 2017.
„The next ten years will decide whether the world continues to drift apart in terms of wealth, income and social opportunity.“

What event of the past ten years has had the greatest influence on your analysis of risk?

The biggest influence was certainly the financial crisis. It revealed the extent to which automatic mechanisms, chain reactions and algorithm-based processes that we are barely able to control now exist in the global economy. Let me tell you about something I experienced myself on the day that Lehman Brothers collapsed in New York. A colleague and I were there by chance, carrying out a study on bankers and brokers. The initial reaction was to switch off the computers and not answer any calls from Washington. This shows how unprepared people were for all the things that began happening. It was an extreme situation and made a huge impression on me.

What can this teach us?

The lesson of course is that particularly the G20 – i.e. the group of the world’s 20 leading industrialised countries, which acts as a kind of informal world government – needs to take effective action to regulate the financial sector. I’m not sure that this will succeed. I believe the opposition is very strong. Automatic mechanisms are extremely advanced. This makes me doubt whether there is still a way of returning to an overarching supervisory authority that really can regulate the financial sector. My hope is that enlightened forces will be stirred in the financial sector itself and that these forces will think about investments focused on the common good and will be able to overcome the greediest forms of casino capitalism.

What lessons have not been learned and what has been neglected?

Many lessons haven’t been learned. On climate change, for example. We’ve known about climate change for more than 100 years. It’s been familiar to us since the mid-1960s, when the first measurements pointed in this direction. It’s been all too visible to us since the start of the millennium, yet so little is being done. Above all, governments are holding each other back. In the old industries, there are strong forces that block any shift towards effective climate protection. And the activities that have begun in civil societies are not strong enough to force politicians in government to step up their efforts. I’d hoped that we would learn our lesson before catastrophe struck. Now we’ll probably have to learn it as the catastrophe unfolds.

Creative take
A highly personal view: Claus Leggewie's creative take on measuring risk.

Personal details

Professor Claus Leggewie, born in 1950, is an author and one of Germany’s best-known political scientists. From 1995 to 1997, he was the first incumbent of the Max Weber Chair at New York University. He was also a guest professor at Université Paris-Nanterre and the Institute for Human Sciences in Vienna and, in 1999/2000, was a fellow at the Institute for Advanced Study in Berlin. Leggewie works on an interdisciplinary basis on intercultural topics and topics related to climate change. From 2007 to August 2017, he headed up the Institute for Advanced Study in the Humanities in Essen. From 2008 to 2016, he was also a member of the German Advisory Council on Global Change.

Website

A profile of Professor Claus Leggewie, along with details of his research and publications, can be found on his personal website.

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Blätter für deutsche und internationale Politik

Professor Leggewie is co-publisher of Blätter für deutsche und internationale Politik, a journal on German and international politics.

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Francis Fukuyama

Opponent of populism and protectionism
Interview conducted on 7 November 2017

The future of history

In 1989, Professor Francis Fukuyama foresaw the impending collapse of the Soviet Union and predicted the ultimate victory of liberal democracy and capitalism. His book The End of History and the Last Man is one of the most-quoted political science works of recent decades. Fukuyama was once a darling of the neoconservatives in the USA, but he increasingly distanced himself from this movement as a result of the Iraq War and the unilateralist foreign policy of George W. Bush. 25 years after the publication of The End of History, Fukuyama sees liberal democracy in crisis and under threat from populism and protectionism. Professor Fukuyama was a guest speaker at the twelfth risk management conference in November 2017.
“Withdrawing from international events creates its own set of problems.“

What event of the past ten years has had the greatest influence on your analysis of risk?

For me it's these big discontinuities. You have to go back a little bit further than 10 years but in the United States we had the Iraq War and then we had the financial crisis. In Europe you had the Euro crisis and the refugee crisis. Both of these in retrospect, I think, were predictable given the policy choices that had been made by the political authorities. But I think the way they played out and their consequences, you know, were very much surprising. And I think they are problems - they created problems that still have not been completely dealt with.

What are the lessons we can learn from this?

I think that the problem that has been created by these events is the rise of a global anti-elite populism. That's present in Europe with the rising number of anti-Europe, anti-immigrant, right wing parties; and with the election of Donald Trump in the United States; the Brexit vote in Britain. And I don't think that we're done with any of these developments. I think that we're going to have to figure out how to both deflect but also to some extent to becalm the anger that is driving the voters and has created these events.

What lessons have been learned and which have gone unheeded?

Well, it really depends: I think that in the United States, foreign policy mistakes that began with the Iraq invasion had to do with the overextension of American foreign policy. And now since Obama and I think continuing with Mr. Trump, there’s been the opposite reaction of withdrawing from international events. So, I think that creates its own set of problems because that global order really requires American leadership. I think in the case of the European Union there's been a vacuum at the heart of Europe. There are some major institutional changes that need to take place in order to manage future crises. I think immigration still remains a major source of unhappiness for many citizens in Europe. And that is an issue that's really also not been dealt with by anyone in Europe.

Creative Take
A highly personal view: Francis Fukuyma's creative take on measuring risk.

Personal Details

Francis Fukuyama, born in 1952, is one of the world's most renowned political scientists. He gained his doctorate at Harvard University and his previous roles include teaching international political economics at Johns Hopkins University in Washington, D.C. He currently lectures at Stanford, one of the USA's top universities. Fukuyama is known as a passionate liberal and a great critic of neoconservatism in the US.

Website

The website of Professor Fukuyama at Stanford University contains a summary of his research work and publications.

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Twitter

Francis Fukuyama's Twitter account has 88.9 thousand followers.

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Thomas J. Sargent

Nobel laureate and expert on monetary policy
Interview conducted on 9 May 2017

Empirical research on policy ineffectiveness

The American economist Thomas J. Sargent is regarded as one of the founders of new classical macroeconomics. The motivations behind people's decisions and their rational expectations are a central part of his research work. According to his findings, investors act much more rationally than is often assumed. In this context, Sargent formulated his hypothesis on policy ineffectiveness, which argues that politically driven monetary and tax policies are foreseeable and thus have no real influence on the economy. In 2011, Sargent and his research partner Christopher Sims were awarded the Nobel Prize in Economics. In November 2017, Professor Sargent will be a guest speaker at the twelfth risk management conference.
“Economists since Keynes have been trying to figure out ways of distinguishing risk from uncertainty.“

What event of the past ten years has had the greatest influence on your analysis of risk?

Well, thinking about other dimensions of risk - not just risk itself, but the persistence of risk. There are many dimensions to the ways in which we think about risk and what people might care about when it comes to risks: Do you care just about the risk? Do you care about its time structure? Do you only consider a risk on its own as something independent and continue to do that over time, or do you care about risk that persists? People have very different attitudes towards this, and what matters is what they do to protect themselves against such risks. They can choose very different approaches to this, and so the kind of portfolios they want can also be very different.

What are the lessons we can learn from this?

There are several lessons. It makes you think hard about what your attitude towards the persistence of risk is. And in the opinion of economists like Lars Hansen, this perspective offers a way of explaining the high excess returns earned by some fama-french portfolios as the compensation that a representative investor who dislikes persistence of risk requires to hold such a portfolio. These big risk premiums are to some extent a compensation for bearing a persistent risk.

What lessons have been learned and which have gone unheeded?

Good question. Economists since Keynes have been trying to figure out sensible and rigorous ways of distinguishing ‘risk’ from a profounder kind of ignorance that they call ‘uncertainty’. We have struggled to find an agreed workable definition of uncertainty that can be used in practical situations. But lots of progress has been made recently, especially by theorists. Now we are trying to apply their ideas to real problems in finance and monetary policy.

Creative Take
A highly personal view: Thomas J. Sargent's creative take on measuring risk.

Personal Details

Thomas John Sargent was born in 1943. He is a Professor of Economics at New York University. Since 1987, he has also been a Senior Fellow of the conservative Hoover Institution at Stanford University. In 2011, Sargent and his research partner Christopher Sims were awarded the Nobel Prize in Economics for their research on empirical methods in macroeconomics. The new assessment methods developed by Sargent and Sims are part of a fundamental set of tools for macroeconomic analysis. In his earlier research and teaching career, Sargent also worked at Stanford University and Princeton University.

Website

The following website offers comprehensive information on Thomas J. Sargent and his work, e.g. an overview of his publications and further research contributions.

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Nobel Prize

Official website of the Nobel Prize organisation, featuring a recording of Thomas J. Sargent's Prize Lecture on 8 December 2011 in Stockholm after receiving the Nobel Prize in Economics together with Christopher Sims.

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Quantitative Economics

This website by Thomas J. Sargent and John Stachurski offers a series of lectures and additional information on the topic of quantitative economic modelling.

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Julian Nida-Rümelin

Philosopher and cultural politician
Interviewed on 3rd November 2016

Philosophy of a humanist economist

Julian Nida-Rümelin teaches philosophy and political theory at the Ludwig Maximilian University of Munich. The former Federal Government Commissioner for Culture and the Media heads up the university's interdisciplinary centre for ethics and runs its executive master's degree in philosophy, politics and economics. His work straddles the boundaries between philosophy and economics and explores the ethical aspects of decision-making processes.
“Without the consent of the affected parties, every risk transfer, every increase in a risk for a person is ultimately unethical.“

What event of the past ten years has had the greatest influence on your analysis of risk?

Obviously I look at risk mainly from a philosophical perspective. I find it extremely interesting to see how society has tried to deal with technological risks such as those involved in using nuclear energy. The debates surrounding this were sometimes highly emotional, but nevertheless led to a certain clarity about the situation, and in the end resulted in the German government essentially ending this technological risk in the wake of the Fukushima disaster. No other country in the world had taken the decision to phase out nuclear energy. It is a very bold strategy. And that was a very big influence on me as a physicist who had originally dealt at great length with issues surrounding energy.

What can this teach us?

One lesson is that you have to get the public involved as early as possible. The notion that we can delegate matters of risk to experts and that the wider population, who are all affected by the risk, are ultimately just supposed to trust those experts and accept their decisions, has been repeatedly proven wrong. It's not just about minimising risks but also about obtaining the consent of the people who are affected. Without the consent of the affected parties, every risk transfer, every increase in a risk for a person is ultimately unethical.

What lessons have been learned and which have gone unheeded?

The lesson from this debate surrounding the risks of nuclear energy is that an 'expertocracy' alone is not enough. Politics has become more attuned here. It is more willing to enter into these debates. At the same time, however, you can't help but notice that something which in the 1970s had played a major role, namely debates about energy scenarios, different perspectives in society, assessments of the impact of technology and visions of the future, has largely come to a standstill. This means we currently have no major debate about the different paths that the global economy could follow. And that is a cause for concern because, ultimately, the political sphere needs to decide the direction it wants to go in. And if this is not preceded by a process of clarification, then it will cause similar turmoil again.

Creative contribution
A highly personal view: Professor Nida-Rümelin's handwritten take on measuring risk.

About

Professor Julian Nida-Rümelin (born 1954) is one of Germany's most highly acclaimed philosophers. He was involved in politics in the field of arts and culture from 1998 to 2002 and teaches philosophy and political theory at the University of Munich. He works closely with the Society of Investment Professionals in Germany (DVFA) to provide ethically sensitive training for financial managers, is co-founder of the executive master's degree in philosophy, politics and economics at the Ludwig Maximilian University of Munich and is director of the Parmenides Academy, which advises managers and other decision-makers on ethical matters.

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Professor Julian Nida-Rümelin's website features his career history as well as up-to-date information about his lectures and research projects.

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University

Professor Julian Nida-Rümelin's web page for the Faculty of Philosophy and Political Theory at the Ludwig Maximilian University of Munich. Here you'll find information on his career history, his publications and his lectures.

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DVFA Ethics Forum

In a video on the website of the Society of Investment Professionals in Germany (DVFA) Professor Nida-Rümelin talks about ethics and integrity in the financial market.

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Stephen A. Ross

Innovator of portfolio theory
† (1944–2017)

Better understanding of market mechanisms

Stephen A. Ross made a name for himself in academia and in practice for his research into arbitrage and option-pricing models. Given the growing complexity of the financial markets, Ross felt it was his duty as an economist to improve the cross-pollination of ideas and approaches in order to promote the understanding of market mechanisms. Professor Ross, who passed away on 3 March 2017, was a guest speaker at the eleventh risk management conference in November 2016.
“If you really want to do something substantive, the simplest solutions are often the best.”

What event of the past ten years has had the greatest influence on your analysis of risk?

Oh, I think the problems of 2008 and the mini recession – or whatever one wants to call it. They certainly changed my view of many things and they changed the views of most economists about what was going on. They made us aware that the usual way of thinking about things wasn’t really going to be acceptable going forward. More complicated things were going on in the world.

What can they teach us?

In terms of trying to model and understand what’s happening in the economy, I think they can teach us much more about institutional forces and institutional settings. And simple things that we used to not really pay a lot of attention to, for example regulation or accounting, have much more profound effects on what’s happening – particularly in the financial markets – than I would have thought was the case.

Which lessons have been learned and which have not?

I think the same problems are going to arise and we’ve done nothing really substantive to solve them. If you really want to do something substantive, the simplest solutions are often the best. And the simplest solution is to require that banks have more capital. And, in fact, if you go back historically, banks used to have a lot more capital. And they had a lot more capital at the very time when the industrial revolution was coming to fruition. To make it even more pressing: not only were they highly capitalised – if you were a holder of bank stocks you didn’t have limited liability, you had unlimited liability. I think people have lulled themselves into thinking that they’ve solved it when in reality they haven’t.

Creative contribution
A highly personal view: Professor Ross's creative take on measuring risk.

About

Stephen A. Ross (1944–2017) was the Franco Modigliani Professor of Financial Economics at the Sloan School of Management, Massachusetts Institute of Technology (MIT). Professor Ross also worked in an advisory capacity for companies and government authorities. He developed the Arbitrage Pricing Theory, the Theory of Agency and the Recovery Theorem. He was also the co-discoverer of the concept of risk-neutral pricing for financial products and the binomial model for the theory of options pricing. His work is of key importance for the theoretical development of interest structure models and his theories offer a wide range of possible areas of application, providing the basis for planning and strategy in investment management.

Obituary


Obituary for Stephen A. Ross of the Massachusetts Institute of Technology (MIT).

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Publications

A comprehensive list of Professor Ross's academic papers can be found on the SSRN website at:

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Masters of Finance

Stephen Ross is interviewed by Richard Roll for the American Finance Association's "Masters of Finance" series.

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Robert J. Shiller

Nobel Laureate and Crisis Prophet
Interviewed on 29 May 2015

Against Irrational Exuberance and Herd Behaviour

Have we learned sufficient lessons to prevent a recurrence of events such as the financial crisis? Distinguished economist and author Robert Shiller, who as early as 2006 was warning of a bubble in the US housing market, has been addressing this question for years. He believes that human psychology played a crucial role in the genesis of the financial crisis. Professor Shiller was a guest speaker at the first and fourth risk management conferences in 2006 and 2009 respectively.
“One has to be aware of one’s own psychological impulses.”

Which events had the greatest influence on your dealing with risks over the past ten years?

The big event of the last ten years has been the financial crisis. It started in the United States and spread to the whole world. It was a crisis related to speculative bubbles, most notably in the US housing market, but also in other countries. The collapse of home prices put millions of households under water and caused them to stop spending. How did we get a home price boom in all these different countries? The fact that it wasn’t just in one country suggests to me that it was something beyond just government policy. It was something in the minds of people. So it confirms for me the importance of understanding human psychology and incorporating these insights into the realm of finance.

What lessons will we learn from this?

For many people the financial crisis was an epiphany. They discovered that bubbles can happen. Speculative bubbles have occurred many times in history. But people had developed an attitude in the late 20th century that there are no bubbles, that markets are perfect. Free markets have important benefits. But we have learned that markets are not perfect. The word ‘bubble’, which was rarely used by financial professionals before, is now used all the time. People ask why that happened. You can’t point to any single person who is responsible. It’s a mass phenomenon that involves a change in all of our psychologies.

What lessons have been learned and what has been neglected?

One lesson that has been overlooked is that one has to be aware of one’s own psychological impulses. At a time when it looks like I should pile into some market which is going up, I have to understand that that is an incorrect impulse. For governments, the lesson has been about regulation and about standing up for the public in regulation. In terms of financial innovation, the lesson to be learned is that the problems revealed by the crisis can be eliminated by new financial mechanisms. Some people have drawn the conclusion that finance is evil. I think that’s the wrong conclusion. Finance is a technology, it’s about making things happen. It’s about sharing risks. And that technology has to be expanded and to be made operative.

Creative contribution
A highly personal view on risk: “O Fortune, like the moon you are changeable, ever waxing and waning; hateful life first oppresses and then soothes as fancy takes it; poverty and power it melts them like ice.“

About

Professor Robert J. Shiller, born 1946, is Professor of Economics at Yale University and one of the most influential economists in the United States. His advice is highly sought after. He did, after all, predict both the bursting of the dotcom bubble in 2000 and the collapse of the US real estate market in 2006. In 2013 Robert Shiller was recognised for his work on the empirical analysis of capital market prices with the Nobel Prize for Economics. Professor Shiller was a guest speaker at the first and fourth risk management conferences in 2006 and 2009 respectively.

University

Robert Shiller's web page at Yale School of Management contains information on his biography, publications and lectures.

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Publications

The website of the Department of Economics at Yale University contains a comprehensive list of Robert Shiller's articles in scholarly journals and other publications.

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Books

The website of the Department of Economics at Yale University contains a comprehensive bibliography for Robert Shiller.

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Paul Krugman

Nobel Laureate and Free-Market Keynesian
Interviewed on 27 May 2015

The Conscience of a Liberal

US economist Paul Krugman has been one of the most prominent critics to warn of adverse trends in the global economy. The 2008 Nobel prizewinner for economics and former presidential advisor enjoys widespread popularity, partly as a result of his weekly column in the New York Times. His blog, entitled The Conscience of a Liberal, is one of the most widely read in the world. Professor Krugman spoke at the sixth risk management conference in November 2011.
“The political process still deals badly with economic crisis.“

Which events had the greatest influence on your dealing with risks over the past ten years?

The financial crisis itself did not in fact challenge my view about the way the world works. The wrong turn in policy, which took place in 2010/2011 – the shift to austerity policies, the abandonment of concerns about unemployment, the hysteria over inflation – was what really shook me. Until that point I had believed that the work I do, what I think of as rational argument in economics, had more influence than it turned out to have. That wrong turn was not driven by anything in particular. It wasn’t that there was a serious discussion, that there was new evidence brought to bear; it was simply political prejudice totally overriding what we thought we knew about economics.

What lessons will we learn from this?

There has been a definite change in views about the financial sector. A substantial part of the political spectrum now understands that there is a reason to regulate banks fairly tightly. We’ve actually been having this discussion in the US among economists. There has been a convergence among centre and centre-left economists who used to disagree a lot, but have converged quite dramatically in the wake of the crisis. They have discovered that actually we have a lot of common ground on issues from financial regulations to taxation to minimum wages. There is actually a surprising new consensus among a good part of people. People who would have been arguing fiercely with each other 15 years ago are now very much in agreement on a whole range of issues.

What lessons have been learned and what has been neglected?

The political process still deals badly with economic crisis. If I were trying to create an architecture of policy, many more things would need to be automatic. In the US system, the existing programmes actually worked very well. We had a terrible recession, poverty went up, but extreme poverty did not because the existing programmes protected people from the worst effects quite well. However, discretionary programmes that would have helped were pulled away almost immediately because the politicians found reasons to not want to do the right thing. So I think we need a system that does many more things on autopilot if we’re going to get through the next one.

Creative contribution
A highly personal view on risk:“Lessons from the past decade: 1.) Learn from history 2.) Use hard thinking, not gut feelings 3.) Question authority - big names don't necessarily know more than you do 4.) Nerds often have the truth“

About

Professor Paul Krugman, born 1953, is a highly influential economist who has warned of adverse trends in the global economy. He is Professor of Economics at City University New York and is considered to be the founder of New Economic Geography. The 2008 Nobel prizewinner for economics and former presidential advisor enjoys widespread popularity, partly as a result of his weekly column in the New York Times. His blog, entitled The Conscience of a Liberal, is one of the most widely read in the world. Professor Krugman spoke at the sixth risk management conference in November 2011.

University


Paul Krugman's new web page at the City University of New York (Luxembourg Income Study Center) contains information on his biography, research and lectures.

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Website

This comprehensive website contains further information on Paul Krugman's biography, the latest articles from both his column in the New York Times and his blog, and a summary of his publication.

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Blog

The blog, entitled The Conscience of a Liberal, features Professor Krugman's comments on current political and economic developments.

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Robert C. Merton

Nobel Laureate and Financial Innovator
Interviewed on 24 February 2015

Using Innovation to Overcome Crises

In the 1970s the US macroeconomist Robert C. Merton played a key role in developing the Black-Scholes formula used to calculate the value of options, for which he received the Nobel Prize together with Myron Scholes in 1997. He teaches finance at the Massachusetts Institute of Technology (MIT) in Cambridge near Boston. Professor Merton was a guest speaker at the third risk management conference in 2009.
“There is no such thing as a free lunch.”

Which events had the greatest influence on your dealing with risks over the past ten years?

I think for me it was not 2008 and 2009 but actually the 1970s, when we had an enormous array of shocks that hit our systems all at once, particularly in the United States: the Bretton Woods system was terminated, we had stagflation, we had high unemployment and we had a 10 per cent inflation rate. The US stock market lost about 50 per cent of its value in real terms over an 18-month period from 1973 to 1974. Another ‘minor’ event was the oil crisis, so all of this hit in one period.

What lessons will we learn from this?

We’re facing another set of big risks today, and we always will. But we came out of that very bad crisis of the 1970s by using an enormous amount of innovation. I hope that today we will take advantage of all the technology and knowledge that we have to improve our systems, address these challenges and again come out better.

What lessons have been learned and what has been neglected?

If I only had one thing that I could teach children everywhere in kindergarten through twelfth grade every year – just like repeating the national anthem or something you would teach them every year – it would be that there is one lesson in finance: there is no such thing as a free lunch. If it’s too good to be true, it’s probably not true. If they learned that and if we practised that, we would occasionally miss out on a few opportunities, but we’d stay out of an awful lot of trouble. If you analyse many of the behavioural elements of 2008/2009, there was a lot of believing – or wanting to believe – that too good to be true was indeed true.

Creative contribution
A highly personal view on risk: “The virtue of risk management can become a vice if taken to an extreme.“

About

Professor Robert C. Merton, born 1944, today teaches economics at his alma mater, the Massachusetts Institute of Technology (MIT) in Cambridge, United States, where he obtained his doctorate in economics in 1970. He is regarded as a leading economist who has often applied theoretical research findings in practice. In the 1970s he played a key role in developing the Black-Scholes formula used to calculate the value of derivatives and options, for which he received the Nobel Prize together with Myron Scholes in 1997. He taught finance at Harvard University from 1988 to 2010. Professor Merton spoke at Union Investment’s third risk management conference in 2009.

University


The website of the MIT Sloan School of Management contains further information on Professor Merton's biography, publications and research.

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Website

Robert Merton's personal website contains a selection of video clips of his lectures and speeches as well as a comprehensive bibliography.

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Daron Acemoglu

Economist and Expert on Failed States
Interviewed on 5 November 2014

Democracy as the Formula for Success

It is often difficult to reconcile theory with reality. One person who appears to have mastered this feat, however, is US economist Daron Acemoğlu. He uses a new politico-economic approach to explain why some countries are more successful than others. For his research he was awarded the John Bates Clark Medal, which is widely regarded as a stepping stone to the Nobel Prize for Economics. Professor Acemoğlu spoke at the ninth risk management conference in November 2014.
“The solution is not to have detailed step-by-step regulations.“

Which events had the greatest influence on your dealing with risks over the past ten years?

I think the financial crisis has been quite influential on all of us. It was largely an unexpected event, though in hindsight its telltale signs were there. But once the scale of this financial shock became clear I think this had a major impact on many economists and on me. It has pushed me towards working more on issues of systemic risk – how small shocks can magnify because of the interaction between financial institutions or because one is a counterparty to another or because many financial institutions are at the same time investing in similar assets and therefore exposing themselves to similar risks.

What lessons will we learn from this?

The academic world has partly learned the lesson that some of these plumbing type issues relate to how different financial institutions connect to each other. What are the fine prints of the financial instruments that they are using? Those have to be taken seriously in a much more holistic approach. Financial risk is necessary, even if you are not a financial economist. For example, macroeconomics dealing with things like GDP and unemployment had largely ignored financial factors and now these have to be taken seriously. On the policy and bureaucratic side the lesson was that deregulation perhaps went too far and financial risks need to be regulated.

What lessons have been learned and what has been neglected?

I think the lessons were not fully understood or digested. Even though the diagnosis that financial deregulation had a lot to do with the financial crisis is partly correct, the solution is not to have detailed step-by-step regulations as for example in the Dodd Frank Act in the United States, which is far too detailed, but to try to deal with the holistic nature of these systemic risks. So in that sense the lessons may have been somewhat incorrectly learned or at least more time needs to pass for the lessons to be fully digested and turned into positive regulatory steps.

Creative contribution
A highly personal view on risk:“When dealing with risks, it pays to be lucky.“

About

Professor Daron Acemoğlu, born 1967, is a Turkish-American economist of Armenian descent. He studied economics in the US and UK and is currently professor of economics at the renowned Massachusetts Institute of Technology (MIT). One of the ten most cited economists in the world, he is a recipient of the John Bates Clark Medal, widely regarded as a stepping stone to the Nobel Prize for Economics. Professor Acemoğlu spoke at Union Investment’s ninth risk management conference in November 2014.

University


Professor Acemoğlu's web page at the MIT Department of Economics contains detailed information on his biography, his publications and his syllabus of lectures and seminars at MIT.

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Blog

Daron Acemoğlu's blog, entitled Why Nations Fail, contains comments on topical issues as well as further information on his book of the same name.

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Hans-Werner Sinn

Ifo President and Lateral Thinker
Interviewed on 23 February 2015

Critic Warning against a 'Bazaar Economy' and 'Casino Capitalism'

Hans-Werner Sinn is a prominent commentator on social issues, providing trenchant analysis on subjects ranging from eurozone bailouts and climate change to the welfare state. In doing so, the boss of the Munich-based ifo Institute of Economic Research is often provocative, but he also provides people with food for thought. Professor Sinn spoke at the eighth risk management conference in November 2013.
“Only if bankruptcy is possible will it not happen in the first place.“

Which events had the greatest influence on your dealing with risks over the past ten years?

That was definitely the US banking crisis and then, following on its heels, the euro crisis. The rescue packages launched in response to these crises have not been very effective. The countries on the eurozone periphery are now desperately trying to regain their competitiveness gradually by imposing reforms and price restraint. But these efforts are being accompanied by mass unemployment that is virtually impossible to keep in check, and this is making people very disaffected. The Greeks have elected Syriza under Alexis Tsipras, who now wants to implement all sorts of radical measures. It is therefore essential for the European Union not to accede to all his demands because that could set a precedent for other governments.

What lessons have been learned from the financial crisis and the euro crisis?

Well, firstly, there are lessons for the banking system. The banks are undercapitalised and are engaged in highly risky business. They should therefore be compelled to hold much more capital on their balance sheets. They would then act prudently from the outset and reject excessively risky business models. However, we also need to stabilise Europe itself. I think we need to impose much tougher budget restrictions in the eurosystem. It should not be admissible for countries to print themselves out of their difficulties. Countries that have easy access to the printing press lack the incentive to implement painful reforms.

What lessons have not been learned and what has been neglected?

The banks’ minimum capital ratios should have been raised substantially as a consequence of the financial crisis. This has not happened. The Maastricht Treaty – especially its no-bailout clause – should have been taken seriously during the euro crisis. This would have required a bankruptcy law for countries. It is not enough to incorporate the no-bailout principle into the treaty simply as a rhetorical device. We need detailed guidelines that stipulate bankruptcy procedures. Although it may sound paradoxical, the possibility of bankruptcy is absolutely crucial to the stability of the system – not the actual existence of bankruptcy but its possibility. Only if bankruptcy is possible will it not happen in the first place.

Creative contribution
A highly personal view: Hans-Werner Sinn's creative take on measuring risk

About

Professor Hans-Werner Sinn, born 1948, has been president of the ifo Institute of Economic Research since 1999, director of the Center for Economic Studies (CES) at the University of Munich since 1991, professor of economics and public finance at the University of Munich since 1984 and managing director of CESifo GmbH since 1999. Professor Sinn spoke at the eighth risk management conference in November 2013.

Sinn's Corner

This web page of the Center for Economic Studies contains a collection of Hans-Werner Sinn's contributions to current political discourse. It also provides links to his biography and a comprehensive list of his publications.

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Tomáš Sedláček

Economist and Capitalism Reformer
Interviewed on 8 April 2015

The Economist of Good and Evil

The Czech economist and economic philosopher Tomáš Sedláček has long been questioning the premise that financial markets are perfect. His bestseller, Economics of Good and Evil, ignited a debate about morals and the industrialised nations' belief in growth. Professor Sedláček is a guest speaker at the tenth risk management conference.
“We are still ready to sell stability in order to buy growth.”

Which events had the greatest influence on your dealing with risks over the past ten years?

Three events have changed the way we view risk: 9/11, the 2008 crisis and Russian intervention in Ukraine. Out of these, our own economic crisis was structurally the most devastating, we did this to ourselves. There is not only a probability but also the probability of a probability – that our probabilities are based on incorrect models. The future is fundamentally unpredictable. It doesn’t help to pretend otherwise. Our biggest threat is within our civilisation, not outside. We are perhaps the strongest civilisation, yet we may be brought to our knees by our own self-inflicted issues, such as debt.

What lessons will we learn from this?

We are still back to “Father, please forgive us, for we do not know what we are doing” to paraphrase the famous prayer of Jesus. Only in our case we need to ask society for forgiveness. But even though we do not know, and we are ready to admit it, we want to speed up and don’t want to create reserves. We are not sure of the direction, but we compensate for this fundamental uncertainty by speeding up. We still think it was the lack of confidence and trust that brought about the crisis, but it was exactly the opposite, it was the overconfidence and lack of carefulness that brought the near collapse of our civilisation. We have not learned much and are still ready to sell stability in order to buy growth. It’s a dangerous and costly growth that we seek.

What lessons have been learned and what has been neglected?

We still don’t know what to do if a big economy goes bankrupt. We have been lucky that the bankruptcies in Europe have always affected small economies, so we were able to solve them in a non-standard way. We still don’t know how to trim our manias. We don’t know how to apply our fiscal and monetary policy properly. Today economists claim that the world works according to economic rules, just like the Pharisees once claimed that the world works according to certain ethical rules. But the bone that Jesus had to pick with the Pharisees, his message, was that there is a deeper underlying meta-structure of which reality is forged. That’s why Jesus talked so much about love, mercy, forgiveness. These are things that fundamentally cannot be put into rules.

Creative contribution
A highly personal view: Tomáš Sedláček's creative take on measuring risk

About

Professor Tomáš Sedláček, born 1977, is a Czech economist and university lecturer. His book, Economics of Good and Evil (OUP, 2011), has become a bestseller and has been translated into 17 languages. Sedláček served as an economic advisor to former President Václav Havel. He is currently the chief macroeconomic strategist at the Czech bank ČSOB, a member of the Narrative for Europe group set up by Manuel Barroso and a council member of the World Economic Forum. His work is known for its philosophical approach to economics, combining economics with psychology, theology, mythology, literature, anthropology, history and pop culture.

University


Tomáš Sedláček's web page at the Faculty of Social Sciences at the Charles University in Prague contains information on his biography, publications and academic teaching.

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Website

Professor Sedláček's personal website contains detailed information on his biography, a list of his publications and a collection of video clips of his public appearances and lectures.

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Blog

Tomáš Sedláček's blog contains comments, interviews and articles on a wide range of topical issues as well as a number of video clips showing for example a theatre play inspired by his book Economics of Good and Evil.

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Emanuel Derman

Sceptical Quant
Interviewed on 5 November 2014

Beware of Big Data

American physicist Emanuel Derman was considered to be one of the first quants on Wall Street. The former head of quantitative strategy at Goldman Sachs now teaches in the Industrial Engineering and Operations Research Department at Columbia University in New York. Today he is one of the most prominent critics of the use of quantitative models in finance. Professor Derman spoke at the ninth risk management conference in November 2014.
“The world isn’t going to satisfy the formulae that you write down.“

Which events had the greatest influence on your dealing with risks over the past ten years?

Well, I am tempted to say the financial crises of 2007 and 2008. But in fact I think I started to feel very dubious about the increasing mathematical nature of risk management before that. I think the tendency of people to assume that there are natural science rules for financial markets is something I have become more and more sceptical about. And I think that came to a head with the financial crises.

What lessons will we learn from this?

Partially I think people learn that that doesn’t work very well but they never stop trying. I am not sure what the solution is. I think you have to try to use models but you have always to look over your shoulder and understand that in any case the world isn’t going to satisfy the formulae that you write down. People are looking for idols – idols in the sense of things that are man-made but nevertheless behave like human beings. That doesn’t happen. You can write down models but you have to understand that at some point they are not going to work at all. Maybe you will be lucky and do better than the models; maybe you will be unlucky and do much worse.

What lessons have been learned and what has been neglected?

People use very complicated mathematics to describe financial markets. I am not saying it’s not a worthwhile thing to do. The syntax they use looks like financial science but the semantics is very different. It just doesn’t work well. People tend to forget that by using a very accurate language, they somehow start to imagine that what they are doing is accurate.

Creative contribution
A highly personal view on risk:“When dealing with risks, it pays to be lucky.“

About

Professor Emanuel Derman, born 1944, grew up in South Africa as the child of Polish-Jewish emigrants. After studying physics at the University of Cape Town, he moved to the US in 1964 and in 1973 gained a doctorate in theoretical particle physics at Columbia University. In 1980, Professor Derman turned his attention to the emerging field of financial engineering, and from 1985 to 2000 developed quantitative strategies for the investment banks Goldman Sachs and Salomon Brothers. In 2000, he was named Financial Engineer of the Year by the International Association for Quantitative Finance. Since 2002 he has been a lecturer at Columbia University in New York, where since 2003 he has taught at the Institute for Industrial Engineering and Operations Research. Professor Derman spoke at Union Investment’s ninth risk management conference in November 2014.

University


Emanuel Derman's web page at the Fu Foundation School of Engineering and Applied Science at Columbia University in New York contains a brief biography as well as information on his lectures and seminars.

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Website

Emanuel Derman's personal website contains detailed information on his biography and publications as well as comments and articles on current affairs and his most recent posts on Twitter.

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Manifesto

Paul Wilmott's blog contains the Financial Modelers' Manifesto co-authored with Emanuel Derman.

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Otmar Issing

Co-Architect of the Euro
Interviewed on 11 March 2015

Where are Germany's Monetary and Economic Policies Heading?

Otmar Issing was chief economist and an Executive Board member of the governing councils of both Deutsche Bundesbank (1990 and 1998) and the European Central Bank (1998 to 2006). He played a key role in shaping the ECB's monetary policy and introducing the euro. He has been President of the Center for Financial Studies at the University of Frankfurt am Main since 2006. Issing is regarded as a monetarist and throughout his career has consistently advocated tightly regulating the money supply and making central banks as free as possible from government interference. Professor Issing spoke at the sixth risk management conference in November 2011.
“The current regulatory system is still far from perfect.“

Which events had the greatest influence on your dealing with risks over the past ten years?

I think the financial crisis hit not just me but virtually the entire profession really hard. When the British Queen visited the London School of Economics to mark the institution’s centenary, she asked in her wonderfully refined English way why, given that there were so many eminent economists working there, nobody had seen the crisis coming. In other words, it came as a shock to the entire profession and triggered new initiatives in the field of risk research. A large number of studies analysed financial market risk much more rigorously than had previously been the case.

What lessons have been learned from the financial crisis and the euro crisis?

I think it is incumbent on us all to do everything we possibly can to ensure that this kind of thing never happens again. However, we should disabuse ourselves of the notions that economic trends always proceed without creating any tensions, that there will be no more crises in financial markets and that we will see no more fluctuations in the business cycle. We really need to rid ourselves of this illusion. The economy moves in fits and starts that have both positive and negative impacts, and this will always be the case. What we must prevent at all costs, however, is the possibility of such extreme boom and bust occurring again that it could push the world to the brink of disaster.

What lessons have not been learned and what has been neglected?

Although many of the proposals made on financial market regulation have been implemented, we certainly have no reason to rest on our laurels yet. The current regulatory system is still far from perfect, and we can once again see signs of certain kinds of speculation being repeated in financial and real-estate markets. We need to nip this trend in the bud, and this requires us to monitor events very closely.

Creative contribution
A highly personal view on risk: “People say that life itself is a risk. But that's no reason not to give life a try. Without risk, life would be boring.”

About

Professor Otmar Issing, born 1936, was chief economist and an Executive Board member of the European Central Bank (ECB) from 1998 to 2006. During this period he played a key role in shaping the ECB’s monetary policy and introducing the euro. He has been President of the Center for Financial Studies at the University of Frankfurt am Main since 2006. From 2008 to 2012 he headed the Advisory Council on a New Financial Order appointed by German chancellor Angela Merkel. He was also a member of the High Level Group of the European Commission chaired by Jacques de Larosière. Professor Issing spoke at the sixth risk management conference in November 2011.

University


The website of the Center for Financial Studies (CFS) at the University of Frankfurt am Main contains a biography of Professor Issing and further information on the courses offered by the CFS.

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Benoît B. Mandelbrot

Father of Fractal Geometry
† (1924–2010)

Beautiful, Colourful Risk: an Obituary by Frank Romeike

"The goal of science has always been to reduce the complexity of the world to simple rules." This quote comes from Benoît B. Mandelbrot, a mathematician who died in October 2010 and was one of the few people to imbue the world of numbers with a new aesthetics and simplicity. Although his bestseller 'The Fractal Geometry of Nature' was more akin to the book of an artist, it also yielded extensive findings for research into risk. Professor Mandelbrot was a guest speaker at Union Investment's first risk management conference in 2006.
“My entire life has been spent studying risk.“

“Clouds are not spheres“

The life of this scientist, who was born in Warsaw in 1924, was dominated by a single question: how can we measure patterns that occur in nature but which simply cannot be understood by using the classical mathematics of perfect geometrical forms? “Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line,” Mandelbrot once remarked. But what shape is a mountain, a coastline or a river? What form does a cloud or a flame exhibit? And how can the volatility of prices be represented in a figurative sense?

From a very early age he developed the extraordinary ability to solve complex mathematical problems by using geometrical visualisation. This all happened during turbulent times: Mandelbrot and his Jewish-Lithuanian family emigrated to Paris in 1936 before the outbreak of the Second World War. These experiences helped to shape his mathematical talent, which “I developed by observing plants and trees while we were fleeing.” In 1944 he passed the entrance exam for the École Polytechnique in Paris with flying colours. “The problem that we were set was easy to solve if you used spherical coordinates instead of Cartesian ones. But I was the only candidate in the whole of France who was able to see that at the time.”

Mandelbrot began his career in the United States in the late 1950s, working in the research department of the Thomas J. Watson Research Center at IBM. Looking back on a career spanning a total of 35 years at the computer giant, Mandelbrot – who eventually became a professor of mathematics – described this period as a ‘golden age’: “I found fulfilment in seemingly unrelated areas that did not follow any usual pattern and were therefore widely regarded as bizarre.”

He was not universally understood. Throughout his life, Benoît Mandelbrot was seen as something of a maverick in the world of mathematics. He remained an unorthodox lone voice, a contrarian and a non-conformist, attaching little importance to formal theorems and proof.

The Mandelbrot set

Even when he was growing up, Mandelbrot had admired Johannes Kepler, the German natural philosopher, mathematician, astronomer and astrologist. Kepler had used his interdisciplinary knowledge to devise three laws of planetary motion. As a young person, Benoît B. Mandelbrot dreamed of discovering something of similarly far-reaching importance. And he succeeded in doing just that when he developed the Mandelbrot set that is named after him. This set represents a pattern that can be used to calculate and visualise the roughness repeatedly occurring in nature as fractals. This happened in 1978 with the computer animation that became known as fractals, and these most intricate of geometric shapes described by the Mandelbrot set show that fractals and roughness – despite their many differences – reveal a few common characteristics.

If you zoom in and look more closely, you can see how the same smaller and smaller intricate shapes and patterns are successively nested inside each other and repeat infinitely. The contour of a section of a fractal – no matter how small – will always look like a coastline. The fractal dimension is a ratio introduced by Mandelbrot which, for the first time, enabled the roughness and complexity of shapes – and even of non-linear events – to be described in quantitative terms. The peculiar thing about the intricate and complex shapes and patterns of fractals is that the underlying equation is anything but complicated for mathematicians: f(z) = zn² + c. The Mandelbrot set ‘M’ is the set of all complex numbers ‘c’ for which the recursively defined sequence of complex numbers z0, z1, z2,... with the formation law zn+1 := zn² + c and the initial condition z0 := 0 remains bounded, i.e. the amount of the sequence members does not grow beyond all limits.

Markets between risk, reward and ruin

Nowadays these findings are used in areas such as medicine, geosciences, seismology, image processing and special effects in cinematography. But the financial services industry has also been able to learn lessons from these findings: if market participants had listened to Benoît B. Mandelbrot more often in recent decades, they probably would not have been so frequently caught off-guard by turbulent events. The inventor of fractal geometry compared the actors in financial markets with sailors. If these seafarers build a ship, they are not thinking about when exactly the next storm will be coming. They build their ship in such a way that it is sufficiently robust to withstand any conceivable storm. Financial market players, on the other hand – according to Mandelbrot – behave as if it were sunny every day. They calculate their ability to sustain risk based on a confidence level of 99 per cent or even 99.5 per cent, thereby ignoring the extreme events (‘fat tails’) that will sink the ship during a storm. Mandelbrot never tired of repeatedly pointing out that the models used in practice systematically underestimate the true risks. He considered financial market theory to be a ‘phoney science’, believing that market gains and losses were determined by extreme events rather than by ‘normal’ price fluctuations. He proved that financial market price volatility could be described not by normal distribution but by Lévy distribution, which in theory – like the Mandelbrot set – exhibits infinite variance.

On the other hand, Gaussian distribution – the probability function widely established up to that point – regularly caused statisticians, climate scientists and capital market participants to fall into the same trap: they assumed that probabilities exhibit a bell-curve distribution and that the larger the deviations from a norm are, the less frequently they occur. And this was where they often went wrong, as Benoît B. Mandelbrot explained more than two years before the great financial crisis – at the first risk management conference held by Union Investment in 2006. “The stock market crash of 19 October 1987 should never have happened,” was Mandelbrot’s view. According to calculations based on normal distribution, the probability of a one-day loss of almost 30 per cent on the Dow Jones was 1 to1050 – a one followed by 50 zeros.

As far as the normal-distribution assumption was concerned, Mandelbrot was also critical of the widely used risk metric ‘Value at Risk’. “Don’t make me laugh. You believe that Value at Risk can quantify the potential risk? ... If you look at how the risk of various financial products is measured, you will find that virtually all evaluations are based on the assumption of normal distribution. That is why risk is systematically underestimated. I hope that my theory of fractals will one day be as easy to use as normal distribution. Then you will see that the risk is actually much greater.” Mandelbrot was convinced that most risk theoreticians had been heading down the wrong path. “My entire life has been spent studying risk,” was his assessment. Benoît B. Mandelbrot gave his final lecture in the spring of 2010, concluding with the words: “Bottomless wonders spring from simple rules, which are repeated without end – again and again.” The father of the Mandelbrot set and fractal theory died in Cambridge, Massachusetts, in the United States on 14 October 2010. He opened our eyes to the fact that fractals form the core of life and that, behind the apparent chaos of roughness, an impressive order exists. Thanks to his fractal geometry we can now understand the Book of Nature a little better.

University


Yale University hosts a website that is dedicated to the memory of Benoît Mandelbrot and contains detailed information on his biography and publications as well as a number of interview.

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About the Author

Frank Romeike, born 1968, is the managing director and founder of RiskNET – a risk management portal – and was previously chief risk officer at IBM. He studied economics, psychology and mathematics in Germany and the United Kingdom. He is an adjunct professor of stochastics and risk management at various universities.

Lecture

A recording of a lecture given by Professor Mandelbrot on the subject of fractals and the art of roughness can be found here.

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