|Prof. Bodie is very popular among finance students especially because of his textbook, Investments, which is coauthored by Alex Kane and Alan Marcus. He speaks to DaulatGuru.com on how students can plan a career in finance and where he expects creation of future finance jobs.||
Prof. Zvi Bodie is the Norman and Adele Barron Professor of Management at Boston University. He holds a PhD from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT's Sloan School of Management. Professor Bodie has published widely on pension finance and investment strategy in leading professional journals. His books include The Future of Life Cycle Saving and Investing and Foundations of Pension Finance. His textbook, Investments, coauthored by Alex Kane and Alan Marcus is the market leader and is used in the certification programs of the CFA Institute and the Society of Actuaries. His textbook Financial Economics is coauthored by Nobel Prize winning economist, Robert C. Merton. His latest book is Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals. In 2007 the Retirement Income Industry Association gave him their Lifetime Achievement in Applied Retirement Research Award.
Thank you Prof. Bodie for taking out time for this interview from your busy schedule. We really appreciate it.
According to Warren Buffett, â€œDiversification is a protection against ignoranceâ€. What are your views on diversification?
It is important to understand that diversification is another way of protection against risk. Risk arises due to various unknown factors. Also uncertainty due to ignorance can lead to surprise elements. So it becomes difficult to model these risks. I donâ€™t know what Buffet exactly thinks. He has a witty use of language.
If there are two equally risky stocks, then we are definitely better off splitting our money rather than putting all eggs in one basket. Only God knows everything and She can take the right decisions.
In my own writings and in the textbook â€œInvestmentsâ€, it is mentioned that in addition to diversification, there are also safe assets available. In USA, you can put all your money in the Treasury Inflation-Protected Securities, or TIPS. I feel that there is significant room for financial innovation in India, particularly in designing safe assets like TIPS for inflation protection.
There is a gap between the theory that is taught in business schools and the practical skills required in investment management. How do you think business schools should bridge the gap?
Business schools should take a cue from other professional schools particularly medicine. There is a much tighter link between the practice and study of medicine. The clinical practice is built into the curriculum. Some MBA students spend their summer in corporate internships. However more practical experience can be acquired by doing a series of internships.
This is an area where business schools can innovate. The theory can be taught in the first year and in the second year the institute can tie-up with corporations or government agencies for field internships. Students can get their hands dirty with practical experience. Theory and practice complement each other.
Initially sound grounding is required by understanding conceptual models. Having said that, you can study the theory and never use that knowledge. It is also not so easy to apply theory and more emphasis on how to apply the theory is required. But I donâ€™t like that some people from the business community come to the class and teach how currently business is run. That is taking it too far, as it is more story-telling than building a conceptual base. Business schools should consistently push the frontiers forward and consistently bring new ideas to the field of finance.
In the present economic situation, which career path in finance has been least affected?
Corporate Finance jobs are less hurt.
Derivatives are important but were used in the wrong way. The right understanding and use of the science and technology of derivatives is required. In the long run, the quantitative finance skills are required.
We should be focused on important issues like retirement planning. In India, investors should consider international diversification more actively. In capitalism, the most lucrative businesses get the focus. One of the major use of financial engineering is wealthy people avoid taxes and get around the restrictions and regulations. So no social purpose is served. The structured products are used for speculating. However there are many socially valuable ways of applying this technology.