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#Finance: Four Questions for Augustin Landier

Following the April 10 HEC Paris - ViaVoice debate on the finance industry and new technology, HEC Professor Augustin Landier shared his vision on the generation gap between younger and older managers; the multi-disciplinary nature of modern finance; and answering the global demand for more finance graduates.

You encourage company managers to provide a long-term forecasts of their firms’ profitability, investment, R&D, etc. Yet, we’ve seen how even the biggest companies like Facebook or Marks & Spencer’s can face dramatic turnarounds overnight. Does this not make long-term vision sometimes risky?

Augustin Landier: Concerns for large risks such as regulatory shocks should indeed be part of the long-term planning of companies. The Volkswagen story is a reminder of that. We also saw it at the turn of the century with Enron, a global brand which disappeared overnight because it was entangled in a huge scandal, linked to its auditor, Arthur Andersen & Co. The bread and butter work of all forecasters is to try to evaluate tail risk, see tell-tale signs of extreme events shaping up, and warn the financial industry. That’s why ESG scores are currently becoming quite popular in financial analysis: people are willing to invest to find ways to evaluate large negative shocks, what we call the “tail risks”.

The Viavoice survey on the probability of a new financial crisis similar to the one in 2008 revealed a generation gap amongst managers. The over-40 generation were far more pessimistic than the under-40s (66%-23%). Your reaction?

The younger generation didn’t live through the Lehman Brothers crisis professionally and are more optimistic. Today, banks are better capitalized. Yet, other crises will happen, even if it’s unlikely to be the same type, and it’s important to bear this in mind. It would be naïve to think the stock market will not go through some form of correction. With monetary policy tightening, it’s possible that stock markets will drop. It’s unlikely to have a systemic effect like the banking crisis.

We’ve seen the arrival of other disciplines in the teaching of finance, behavioral psychology, for example. Do you see creative debate between advocates of classic, more traditional students of finance and advocates of psychology?

But they are complementary! For example, people looking to work for hedge funds are looking for strategists. Those strategists have to base their work on anomalies which, ultimately, are rooted in psychology. So, in fact, they join up. Next year, I’ll be starting a new class on behavioral finance. People are naturally excited by the topic: it’s fun to link financial markets to psychology, it gives a very intuitive and practical flavor to the field.

Pierre-Emmanuel Juillard said France has a strong tradition in high-quality engineering graduates, ideally educated for the finance industry, but there are simply not enough coming out of its schools. Why, in your opinion?

Well, I don’t know for the rest, but I think HEC Paris is proving very strong in this department. For example, we’ve recently established a partnership with Polytechnique on a joint data science degree for business. On top of this, more and more degrees are embedding those data analysis skills into their programs. Python or R have become the new Excel! The students are getting used to crunch data, it’s become part of what a good generalist should be able to do, it’s not even considered like a specialized skill anymore. It’s just being able to look at the data, visualize the data and get some concrete feel for what’s in there.

30 years ago, being a star at using Excel would give you an edge in an investment bank. Today, it’s much more the idea of having basic knowledge on how to visualize data and do a little bit of statistics and a few regressions here and there. You can see a trend here, I’m happy about that because it should be part of what a generalist can do, not just the preserve of specialized engineers. I’m really looking forward to a time when you can see managers in the executive suite discussing much more rationally about data than they are doing nowadays. Today there’s a lot of soft data and gut feeling. Gut feelings are good but they should be reinforced by data. The beauty at the moment is we see all these tools which help us to visualize data and allow us to wander inside it. It no longer has to be ugly and boring, it can create tools which allow us to see what was invisible before. And that’s a true revolution.