Andrew Lo stood tall in a gray suit and tie, attempting to rationalize the insanity of men like him, who, in a euphoric frenzy, forced housing prices into free fall. He described a survival-of-the-fittest ecosystem, where C-level executives “can either satisfy investors with high earnings today and contribute to the destruction of the financial system tomorrow, or refuse to cash-in on the unsustainable highs today and accept failure as an individual forever.” But only a few minutes before, he had praised the market and the central concept of limited liability with an equally intriguing statement, “The idea that an entrepreneur can have infinite upside but lose only everything they invest – that they can keep their freedom and their loved ones – is a tremendous boon to our world’s development.” Despite the opportunity limited liability could provide, it was the Fall of 2008. Andrew Lo’s lecture hall was lined with graduate students anxiously wondering what employment a wrecked financial system would have for them. I, however, started class at a local …show more content…
When I reached the door, I froze. I realized I had only one desire: to think. I returned to my seat, reopened my notebook to the sketches filled with overlapping arrows linking assets and risks, while a series of equations lined the margins, showcasing symbols that I had learned only this morning. They described risk and risk management, becoming increasingly nuanced with each added term. The beautiful equations, the financial collapse, and Andrew Lo’s conflicting truisms kept bringing me back to one question: Are the fundamental principles of evaluating an investment somehow flawed, explaining the mispricings that destroyed the financial system from the inside-out? It seemed that leading theories adjusted asset prices for uncertainty in future returns, but not the uncertainty in the uncertainty in future returns. And these observations just kept piling