- financial derivatives,
- synthetic vehicles,
- structured products fine-tuned for clients’ risk appetites (in a CAPM sense of risk),
- public corporations,
and “modern finance" generally add real value to the economy?
Aaron Brown addresses the question by imagining a finance quant sent to the fantasy-history of Medieval Europe.
Do we [quants] knowanything … that is useful or interesting on its own? Or do… we … represent a small and arbitrary cog in a large machine? Have we addressed basic human questions of interest to the ages? Or are our skills specific to our era, about as useful in the sixth century as knowing the keystrokes to use Windows without a mouse or the names of all the Academy Award winners for costume design?
Basically, AB’s answer is that:
- securitisation spreads risk around to various parties, making the financing of large projects possible. For example small merchants could band together, with the aid of contracts, to jointly finance ventures they would be unable to finance alone. (Also less economic inequality is required to finance ventures.) More trade voyages means more trade means more wealth.
- because of reasons given in the Central Limit Theorem and Modern Portfolio Theory, pooled risks can make an overall safer portfolio. So a large investment portfolio composed of fractions of twenty ships bound for different ports has lower variance than a portfolio composed of one ship.
It’s a clever restatement of the standard reasons that finance Is supposed to be good.