Monday, November 09, 2015

Lo: Finance doesn’t have to be a zero-sum game

I think we're all a bit gun shy of terms like financial engineering because of the degree to which unscrupulous or ill-advised investment bankers and others created financial instruments that almost destroyed the world economy back in 2008. But if we can put aside that prejudice for a while, we can recognize that use of some financial instruments and strategies can permit society to advance on many fronts with an appropriate amount of risk.

It is in that light that I highly recommend that you watch this TEDxCambridge talk by MIT's Andrew Lo. Andrew has a thoughtful concept that might speed the development of cancer treatment drugs. He asks "Can financial engineering cure cancer?" and notes:

This short non-technical exposition highlights the impact that each of us can have on treating cancer and other diseases, no matter who we are or what we do for our day jobs. I’ve been amazed at the connections that have emerged from random conversations with total strangers about cancer, and how useful those connections have been in getting us to this point.

Take a look!


We are making breakthroughs almost weekly in our understanding of cancer and other deadly diseases, both in how to treat and – in some cases – how to cure them. So why is funding for early stage biomedical research and development declining just when we need it most? One answer is that the financial risk of drug development has increased, and investors don’t like risk. What if we could reduce the risk and increase the reward through financial engineering? By applying tools like portfolio theory, securitization, and derivative securities to construct “megafunds” that invest in many biomedical projects, we can tap into the power of global financial markets to raise billions of dollars. If structured properly, investors can earn attractive returns with tolerable levels of risk, and many more patients can get the drugs they desperately need. Finance doesn’t have to be a zero-sum game; we can do well by doing good if we have sufficient scale.

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