Why Is It Only The B.Music Grads Who Are Driving Lamborghinis?

by Rick Nason, PhD, CFA

Partner RSD Solutions Inc.

I recently gave a speech with the above title to the risk group at a large financial institution. It was a very exciting yet intimidating audience to talk to. Most of the audience members had advanced degrees in Mathematics or Physics, while most of the younger audience members had Masters degrees in Financial Engineering or Financial Mathematics. It was a thrill and an honour for me to be invited to spend some time with them.

The title of my talk might seem a bit strange – and perhaps even insulting to such an audience. To insult them however was the exact opposite of my objective. The point of my talk instead was to focus on how the career in risk pendulum may have shifted and that mathematical skill may not be the competitive advantage it once was. Instead my hypothesis is that mathematical skill combined with creativity, artistic and humanistic skills are the portfolio of skills that are now necessary in risk management.

Before continuing I should explain some of my personal basis for my arguments. I am a physicist that converted a graduate career in physics into a graduate degree in finance during the early 1990’s. I very much benefited from the Wall Street hunger for physicists at the beginning of the “math boom” in finance. However it is my liberal arts undergraduate degree that I consider to be the most valuable in my development as risk manager. I believe that the ability to think in liberal arts terms as well as mathematical terms is the new black in risk management.

Knowledge of risk techniques is a commodity. The ability to think and implement risk management is the value added, and in order to think and implement risk you need to understand a variety of aspects of risk – some quantitative but most qualitative. Additionally you need to be creative and flexible in your thinking. Unfortunately the business schools and financial engineering schools (and corporate training programs that produce cookie cutter analysts and consultants) are very good at disseminating knowledge, facts and frameworks, but knowledge, facts and frameworks are not the same as the ability to think and do!

One could argue (and I will argue in a future blog) that risk management is more about understanding people at both the individual level (within an organization and within the level of immediate stakeholders) as well as at the sociological level. Economists and Finance academics are currently rushing to make their mea culpas that their models cannot work in a world composed of irrational masses. The Behavioural Finance field has evolved to chronicle our collective mass irrationality (stupidity?) but offers few if any solutions for overcoming this collective handicap.

We thus come back to the fact that it is the artists of the world who may be best prepared to deal with the current shortcomings of quantitative risk management and repair the image of the field. Ironically physics and mathematics used to attract the creative types – those who dreamed and thought creatively. When I was a graduate student in physics it was common for students to use psychedelic drugs not for pleasure but to help them think more creatively and more outside the box. (Names withheld for obvious reasons.) While I am most certainly not advocating illegal drug use, I do believe that there needs to be a call made for more creativity and artistic license in the field of risk management. Physicists and financial engineers also like to drive Lamborghinis and should release their inner artist in order to regain the comparative value added that allows them to do so.