Harry Markopolos, the Madoff whistleblower whose new book, No One Would Listen
is out tomorrow, had a brief interview in the Sunday NYT magazine.

This quote leapt out at me:

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Q: Where did you learn about finance?

A: You don’t learn much in grad school. Half the formulas they teach you are false. It’s a lot of self-study. I read a lot of finance books, and I usually read them with a calculator because I go through the math to make sure I master the formulas.

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One other line that I could not agree more about: “It’s a lot of self-study.”

Category: Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “QOTD: “Half the Formulas They Teach You in Grad School Are False””

  1. cognos says:

    I did the MBA and the CFA.

    Not only is the CFA on balance, more valuable material (if you’re focused on trading, investing, speculation as opposed to marketing, management, etc) but it also gives you training in one of the great key skills in life — self study. Most real learning… happens by your self.

    Looking back on the US education system… it needs more study-time, reading-time, and mentored self-study. And less “group class” lectures and activities.

  2. QOTD:

    “The conventional view serves to protect us from the painful job of thinking.”
    -John Kenneth Galbraith
    ~~
    as Markopolos points out, most of Finance is B*******. needless complexity meant to obfuscate, rather than illuminate..

    http://www.thefreedictionary.com/obfuscate

  3. budhak0n says:

    I learned about “finance” on the streets of Philadelphia. Whenever somebody tells you something that stinks, it usually does.

    Whenever tells you something that’s too good to be true, it is.

    Whenever somebody is overly angry about something, it means they had to begrudgingly pay you a whole lot of money.

    Whenever somebody doesn’t know their own address, it means they feel guilty about how much money they make.

    Whenever somebody tells you with completely certainty what to do with YOUR Money, they are doing something else with their own.

    And on and on and on

  4. bonghiteric says:

    Revenge of the nerd

  5. wunsacon says:

    >> Looking back on the US education system… it needs more study-time, reading-time, and mentored self-study. And less “group class” lectures and activities.

    Couldn’t agree more. If I may exaggerate slightly, “lectures are for the lazy”.

    OT: Probably true of churches, too.

  6. troubled times says:

    It takes ” a lot of self-study” …Well that means we can count on scam after scam after scam.

  7. Sure, half the formulas are false…the trick is figuring out which half.

  8. dsawy says:

    Most of the modern theories I’ve read of in finance are BS. If I see a model where they assume a gaussian distribution of price movements, I know it is BS from the get-go.

    Most of the BS I find in modern finance is in the assumptions. Assuming investors are rational, for example, is just such obvious bullshit – yet it is an assumption that is widely made. Investors and/or speculators are “rational” only in the middling parts of market cycles. At the extremes of market behavior (booms and crashes), people are, on balance, crazier than a rat in a coffee can.

    The most blatant fraud foisted upon the American public (indeed, the world) is that economics is a science, dismal or otherwise. It is no such thing, and in most cases, economists might as well be tossing chicken bones on the counter while making their predictions.

  9. No BS says:

    Biggest myth in finance – risk free rate.

  10. Mannwich says:

    They should just officially rename one of the courses – “Financial Models with which to Fleece the Sheeple 101″ and be done with it.

  11. lehunter says:

    We say this when we teach Med students, too. Half the time, you will get the prescription (at least the dose, if not the drug) wrong. The problem is, we have no idea which half. I imagine it’s the same in finance, where there are even fewer scientific underpinnings.

  12. ashpelham2 says:

    the only truly helpful finance course that matters is never taught to anyone except by their parents. And then only maybe.

    Personal finance is among the most important things a person can learn. And I don’t mean home ec or how to balance your checkbook. I mean the ins and outs of why it’s important to buy a used car versus a new one. Why interest rates on personal loans matter. How long it will take to pay off a credit card if you run up a balance. What to do to prepare to become jobless. What to do while you’re working to prepare for retirement.

    Indeed, none of those topics were covered with any depth during my business school stint. Could be because I majored in accounting rather than general finance or something else. Management as a major in undergrad should be done away with altogether, and perhaps Marketing as well.

    I could lecture for 2 weeks non-stop, with eating or sleeping or taking a piss, on the importance of paying attention to the fine print, for most consumers. I hope this debt binge we are recovering from is a wake up call, but I know better. Let’s face it: the real reason it’s so easy to get a drivers license is because it causes one more person to buy a car, gasoline, oil, more trips to the “store” and less time spent at home where you can’t damage your personal finances (with the notable exception of intarweb shopping).

  13. KentWillard says:

    Amen. Even if the formulas aren’t wrong, it still requires a lot of self study and understanding the application.

  14. I was only able to achieve a degree in the school of hard knocks. You never graduate from there. It is lifelong learning. You are always being educated.

  15. Scott says:

    BR, would you care to throw a list of what you think the most common and most obviously wrong formulae are?

    Lots of finance students on your site would love to be able to challenge their professor!

  16. iamsosmrt says:

    I am doing my MBA in Investment Management right now (anyone hiring?), and mostly agree with everything being said, especially about a “risk free” rate. I’d say that degrees are merely “signals” to employers. If I do well in a finance program then I’m telling you that I learned these formulas, so surely I can learn whatever methodologies you’ll be telling me to use once on the job. I’m just glad I’m beyond the half-way point in a one year program

  17. MorticiaA says:

    Madoff called Markopolos a “joke in the industry?” ROFLMAO!!!

  18. scharfy says:

    In theory, theory and practice are the same – In practice, they are not. – Lawrence Peter “Yogi” Berra.

  19. Moss says:

    I always liked the hurdle rate. The concept alone is a testimonial to the delusion of finance.

  20. jjay says:

    MBA logic is easy.
    Take over an old line, well run business, with a sterling reputation for a quality product.
    Ramp up production to turn the order backlog into cash,.
    To do this, throw quality out the window, take on loads of debt, offshore production, and rely on years of hard earned trust in the companies product to foist junk on customers.
    As the backlog dwindles to nothing, and the end is near, declare a huge bonus for the executives,
    then file bunkruptcy.
    Worked well for the last 30 years or so, now they have run out of well run companies to loot,
    so they did the same scam with mortgage debt.
    Then they had to loot the Treasury for a swan song.
    Parties over now, I guess.

  21. kahapeterson says:

    The good bits of my MBA could be scribbled on the back of an envelope. You only need to know about 5 or 6 formula and then rest is all “street sense”.

    Here are my favorite delusions:

    Delusion #1 “Risk Free Rate”
    Delusion #2 Indifference to how assets are financed
    Delusion #3 Failure to track systemic risk through off the balance sheet activities (largely due to overly complex structures)
    Delusion #4 Black Scholes
    Delusion #5 “You’re comparing a stock to a flow, silly”
    Delusion #6 Executive remuneration. They really aren’t worth that much.
    Delusion #7 Alpha. The dartboard beats 80% of fund managers 80% of the time (refer to delusion #6).