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>What a lot of people probably dont realise when they read the term "business" is how big a fraction of management attention, incentives and remuneration is pur

>What a lot of people probably dont realise when they read the term "business" is how big a fraction of management attention, incentives and remuneration is pure financial engineering an anecdote I've shared before, was talking to an acquaintance from my child's kindergarten who was an investment guy and I said I thought that finance services were increasingly capturing too much value and he countered that was because finance was where "all the innovation is." He later got indicted for fraud and couldn't explain how a lot of money disappeared.

nologic01 4y ago
you anecdote is very apposite and imho applies beyond just the financial realm. financial innovation is dirt cheap. get enough aligned interests around a table and you can create new contracts, new financial markets etc out of thin air. its all fundamentally just a game around information control, an intermediary forcefully interjected in the economy and extracting rents. now, the quiz: in which other sector is most "innovation" dirt cheap and essentially just a game around information control, an intermediary forcefully interjected in the economy and extracting rents? the only thing that could be worse than what we have today is when those two "innovative" sectors merge. yet this outcome is inevitable and it will happen fairly soon.
- djbusby 4y ago
  What's the other sector? Tech?
  - lazide 4y ago
    Not the poster you are replying to, but IMO it clearly applies to a large number of tech sectors, medical care, real property, and higher education.
  - cudgy 3y ago
    Pharmaceuticals?
lordnacho 4y ago
As a finance guy I don't see a lot of core innovation. Somehow I've been able to understand pretty much every financial instrument I've come across using a few basics that you learn immediately when you get into the business: Time value of money, optionality, non-arbitrage. There's a million ways to cook up a financial product from those and I'm not going to pretend I know them all, but it's like how a chef can look at a dish from another culture and still more or less describe what it is: sugar, fat, acidity, heat, etc. When exciting things have happened in finance it's often been purely because the exciting thing became legal. Things like buybacks or the repeal of Glass-Steagal. The other thing that can happen is that some sales team finds a way to sell the thing that creates an ecosystem around it, like Credit Default Swaps. Rarely is it the financial contract itself that is so inventive as to create a market.
- pyuser583 4y ago
  Is there a book about this you recommend? Those basic concepts?
  - lordnacho 4y ago
    Hull. Options, Futures, and Other Derivatives. Also Wilmott. Can't remember the name but it will be obvious. It's pretty much high school math, you establish what the cash flows are and the value of the thing flows from there. When it comes to optionality you probably haven't done stochastic calculus in high school, but you can follow along anyway. Both books will explain interesting things like how to price an option on an option, that kind of thing. Non-arbitrage is what holds the the whole thing together: if the price didn't follow {rules} then you could do {steps} to make free money.
    - temp51723 4y ago
      Paul Wilmott Introduces Quantitative Finance
- gizmo 4y ago
  > Time value of money, optionality, non-arbitrage. Another big one is "opacity". A financial product that is convoluted and needlessly complicated allows the most sophisticated financial players to consistently take advantage of the rest. Much in finance is zero sum. Your outperformance is somebody else's underperformance. Financial products that are understood by everybody will not make you a lot of money, because they will trade approximately at their fair value. This is why so much in finance is complex instead of simple. By analogy: PDF is terribly complicated because Adobe didn't want their PDF software to become commoditized. A bad and illogical file spec benefits Adobe at the expense of everybody else.

nologic01 4y ago

you anecdote is very apposite and imho applies beyond just the financial realm. financial innovation is dirt cheap. get enough aligned interests around a table and you can create new contracts, new financial markets etc out of thin air. its all fundamentally just a game around information control, an intermediary forcefully interjected in the economy and extracting rents. now, the quiz: in which other sector is most "innovation" dirt cheap and essentially just a game around information control, an intermediary forcefully interjected in the economy and extracting rents? the only thing that could be worse than what we have today is when those two "innovative" sectors merge. yet this outcome is inevitable and it will happen fairly soon.

djbusby 4y ago
What's the other sector? Tech?
- lazide 4y ago
  Not the poster you are replying to, but IMO it clearly applies to a large number of tech sectors, medical care, real property, and higher education.
- cudgy 3y ago
  Pharmaceuticals?

lordnacho 4y ago

As a finance guy I don't see a lot of core innovation. Somehow I've been able to understand pretty much every financial instrument I've come across using a few basics that you learn immediately when you get into the business: Time value of money, optionality, non-arbitrage. There's a million ways to cook up a financial product from those and I'm not going to pretend I know them all, but it's like how a chef can look at a dish from another culture and still more or less describe what it is: sugar, fat, acidity, heat, etc. When exciting things have happened in finance it's often been purely because the exciting thing became legal. Things like buybacks or the repeal of Glass-Steagal. The other thing that can happen is that some sales team finds a way to sell the thing that creates an ecosystem around it, like Credit Default Swaps. Rarely is it the financial contract itself that is so inventive as to create a market.

pyuser583 4y ago
Is there a book about this you recommend? Those basic concepts?
- lordnacho 4y ago
  Hull. Options, Futures, and Other Derivatives. Also Wilmott. Can't remember the name but it will be obvious. It's pretty much high school math, you establish what the cash flows are and the value of the thing flows from there. When it comes to optionality you probably haven't done stochastic calculus in high school, but you can follow along anyway. Both books will explain interesting things like how to price an option on an option, that kind of thing. Non-arbitrage is what holds the the whole thing together: if the price didn't follow {rules} then you could do {steps} to make free money.
  - temp51723 4y ago
    Paul Wilmott Introduces Quantitative Finance
gizmo 4y ago
> Time value of money, optionality, non-arbitrage. Another big one is "opacity". A financial product that is convoluted and needlessly complicated allows the most sophisticated financial players to consistently take advantage of the rest. Much in finance is zero sum. Your outperformance is somebody else's underperformance. Financial products that are understood by everybody will not make you a lot of money, because they will trade approximately at their fair value. This is why so much in finance is complex instead of simple. By analogy: PDF is terribly complicated because Adobe didn't want their PDF software to become commoditized. A bad and illogical file spec benefits Adobe at the expense of everybody else.