Friday, September 13, 2013

Rajan : Intellect to spare

As I walked up to the shabby building in downtown Chicago, battling the bone chilling wind from the lake in 1992, I was looking forward to Rajan’s class. I made the trip from Hyde Park in anticipation of new information and I was never disappointed. Albeit being contemporaries at IIT, my engineering path left me distinctly ignorant of economics and he gave me more than I was bargaining for.

Freshwater economics was refreshing as it provided a robust framework, not unlike the engineering I was used to. The young professor was already showing brilliance as he systematically explained traditional finance from 6 PM to 9 PM. My first peek into research was also instructive with an empirical study into decision-making in financial markets. I attempted to soak the knowledge in with unreliable results. It sounded interesting but it was unclear if managers in firms made decisions that way. Later,I would find that managers were worse, much worse.

The theory was clear – but in practice it turned out be nearly useless. Chicago’s tendency to be enamored by deterministic models is its Achilles heel, as it argued what should be without asking why it is not so. Not many make decisions discounting cash flows but most do calculate an NPV that is swept aside by decision-makers as either irrelevant or incorrect – and for good reasons. Decisions were never that simple – neither in companies nor in the macro economy.

It will be interesting to see if he can bring back an economy in shambles, driven to hell by socialistic and ignorant policies for over five decades.