Is the Financial Industry Evolving with the Technological Revolution?
How is the financial sector responding to the technological leap witnessed over the past decades? In what way has the arrival of AI and Big Data, as well as psychology, affected the teaching of financial mechanisms and the profound mutations in companies hiring policies? These were just two of the questions debated by HEC Finance Professor Augustin Landier and AXA-IM Chorus Managing Director Pierre-Emmanuel Juillard at the April 10 breakfast meet organized by HEC Paris and ViaVoice.
Despite his relative youth, Augustin Landier has a long and consistent record of audacious positioning on the global financial questions of our times. For example, the self-proclaimed financial libertarian criticized the notion of economic patriotism in France in 2006; a year later, he called for banks to end opaque practices and release all its data on more intangible sectors; in 2008, Landier supported the notion of socially responsible investment.
Three years on, he joined forces with long-time collaborator David Thesmar in a call to capitalize European banks. Then, in 2013, the two professors brought out Ten Ideas which are Sinking France, an uncompromising analysis of economic clichés they believe are undermining the French economy. One is the fear of robotization, another is that you need to save industry in order to save employment.
Fast-forward to 2018, and the 43-year-old does not hesitate to denounce the dangers of opacity, short-term vision in managerial circles and lobbies for better financial information. Landier also advocates for new employment opportunities which take into account the technological revolution of the past decade and the essential role played by behavioral psychology in the finance industry.
Survey Brings Out More Pessimism in +40 than -40 Managers
These ideas were just a few in a series of exchanges with Pierre-Emmanuel Juillard during a lively April 10 debate in front of Paris-based journalists. The central theme zoomed in on the impact of new technology on the financial world, but the debate also touched on subjects as diverse as employment in finance, curricula in universities and bubbles in the economy. Landier and Juillard were invited to respond to a Viavoice study entitled “Where is finance going?” The survey asked 400 French managers to judge the perceptions of a possible repeat of the 2008 financial crisis and the impact new technology could have on financial risks.
“The results show that the over-40s are more pessimistic than their younger counterparts,” said Landier. The specialist in behavioral economics referred to the study’s figures revealing that 67% of over-40s believe new technology increases financial risks because computer programs can take irrational or unjustified decisions. That’s 14% more than the under-40s. “This tendency is reflected in the student population I teach at HEC,” he pursued. “They weren’t working in financial circles in 2008 and were babies during the internet bubble. They simply can’t imagine a market crash. Which is a mistake, in my opinion - although I understand that, with the crisis behind us these past couple years, there is more optimism. But students just don’t believe in bubbles, they don’t analyze what’s behind the recent bitcoin losses, for example. The older generation, on the other hand, is still weighed down by the traumas of 2008 and 2001.”
Finance Opens Up to Complementary Disciplines
Pierre-Emmanuel Julliard insisted this is one of the reasons his AXA-IM company is keen to hire younger engineers. “There is less cynicism amongst them,” he told the journalists gathered at the Rotonde Brasserie, in Paris’ Montparnasse district, for the debate. “They are more willing to work constructively for a better world and be less individualistic, it’s natural.” According to its Managing Director, AXA IM Chorus encourages productivity by making it less vulnerable to unexpected changes in the market. “In this way, we motivate people to invest more in the economy, it creates a virtuous circle.” The former partner with Goldman Sachs analyzed the changes witnessed in the past 30 years. “Beforehand, economists believed the market was efficient and self-regulating. Now, we’ve understood that this is simply not true. Traders have the very human tendency to over-react to market deviations. And they under-react to more discreet factors such as the exchange rate. As a result we need specialists who combine several disciplines, not just financial and engineering but also psychological. In the last 15 years, this has been the biggest evolution, a convergence of complementary skills bringing, for example psychology with finance. That answers the questions on the infallibility of the stock market.”
Augustin Landier also insisted on the multi-disciplinary approach to the stock market nowadays. “Behavioral psychology is incorporated in all work on the stock market because we better understand that human error is inevitable. The latest choice of the Nobel laureate in Economy (ed., Richard H. Thaler) underlines this. The synergy between the financial industry and psychology corrects the biases revealed in the financial actors’ behavior.”
Impact of New Technology
Landier then developed his analysis of the impact of technological changes in the past two decades. “It’s been huge,” he admitted. “The use of large datasets is omnipresent in the asset management industry. The “Quant” approach to asset management has been getting traction. But it’s also provoked a polarization between low-cost products and hedge funds which have become more sophisticated.”
The recently-appointed professor of Finance at HEC believes strong re-adjustments of stock markets in the coming decade are possible, but also believes they should be weathered by the system in place. “Banks are better capitalized. We understand the frictions in the market much better than in 2008, in particular the danger of deleveraging spirals,” Landier insisted. “What is now needed is greater transparency in the financial industry. If data were accessible, deep, transparent and standardized, it would no longer be a zero sum game with winners and losers. We should work towards a win-win system with new technology helping us to harmonize all this.”