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Investment Management: A Science to Teach or an Art to Learn?

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In the aftermath of the 2007–09 financial crisis, mainstream finance theory was criticized for having failed to either prevent or forecast the market crash, which resulted in large losses for investors. Worse, the suggestion was made that the crash itself was the result of bad or poorly applied theory. Although markets have since recovered, surpassing precrisis levels as of the end of 2013, the investors enjoying the recovery are not always the same investors as those who suffered the losses. So, in many cases, the crash caused permanent impairment of wealth.

This crash is particularly interesting in that finance theory, not simply the practices of the financial services industry, has been directly blamed. This book explores current critiques of mainstream theory and discusses implications for the curricula of finance programs at business schools and universities. It is based on conversations with academics and practitioners in the industry and a review of the literature.

Has mainstream finance theory—which many consider an idealization that does not take into account market reality—failed investors? Do we need to reconsider the theory and how it is taught?

About the Author(s)

Frank Fabozzi
Frank J. Fabozzi CFA
Sergio M. Focardi

Sergio Focardi is a professor at EDHEC Business School and a founding partner of The Intertek Group. He is on the editorial board of the Journal of Portfolio Management and has co-authored numerous articles and books, including the Research Foundation of CFA Institute monograph Trends in Quantitative Finance and the award-winning books Financial Modeling of the Equity Market: CAPM to Cointegration and The Mathematics of Financial Modeling and Investment Management. Dr. Focardi is also co-author of Financial Econometrics: From Basics to Advanced Modeling Techniques and Robust Portfolio Optimization and Management. He holds a degree in electronic engineering from the University of Genoa and a PhD in mathematical finance from the University of Karlsruhe.

Caroline Jonas