right goals wrong tools

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Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financi al Science', http://valueerodingfallacies.blogspot.in Right Goal, Right Goal, Wrong Tools Wrong Tools

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An aim without a method is useless. A method without an aim is dangerous. Corporate bankruptcies and financial crisis couldn't have been explained better than these words by Deming,

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Page 1: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Right Goal, Right Goal, Wrong ToolsWrong Tools

Page 2: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Jim Yong Kim,World Bank Group

President

Page 3: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

“Our new approach calls for individuals and institutions to shift shift

from being ‘crisis fighters’ to from being ‘crisis fighters’ to proactive and systematic risk proactive and systematic risk

managers.managers. Doing so will help build resilience, protect hard-won protect hard-won

development gainsdevelopment gains,, and move us closer to achieving the World Bank Group’s goals of ending extreme

poverty and boosting shared prosperity.”

Page 4: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Kaushik Basu,World Bank Chief

Economist and Sr. Vice President

Page 5: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

“This World Development Report shows human decision-making falters most human decision-making falters most

where risk is involvedwhere risk is involved – for this reason, risk creates special challenges for development policy. As globalized nations contend with fluctuations between good and bad outcomes,

there is at times a propensity to shy away from development and

globalization, when in fact doing so is to opt for the bad outcome in

perpetuity.”

Page 6: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Norman Loayza,Director, World Bank - World Development

Report

Page 7: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

“Although people’s own efforts, initiative, and

responsibility are essential to manage risk, their success –

in terms of resilience and prosperity – will be limited will be limited

without a supportive without a supportive environment.”environment.”

Page 8: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

““An aim without a An aim without a method is useless. A method is useless. A

method without an aim method without an aim is dangerous.”is dangerous.”

- W. Edwards Deming

Page 9: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

““No problem can be No problem can be solved from the same solved from the same level of consciousness level of consciousness

that created it.”that created it.”

- Albert Einstein

Page 10: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

“ The riskiness of an investment is not is not measured by betameasured by beta but rather by the reasoned

probability of that investment causing its owner a loss of purchasing power over his

contemplated holding period.”

“Investment in productive assets, whether businesses, farms, or real estate - ideally,

should have the ability in inflationary timesinflationary times to deliver output that will retain its purchasing retain its purchasing

power valuepower value””

Berkshire Hathaway, letter to Shareholders, February 25, 2012 by Warren E. Buffett, Chairman of the

Board

Page 11: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Berkshire Hathaway

Dow Jones Index

Jan,1990 to Feb,2014

Page 12: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

“the opportunity cost of capital depends on the project’s depends on the project’s

betabeta. .... ...SiemensSiemens, a German , a German industrial giant, uses 16 different industrial giant, uses 16 different discount ratesdiscount rates, depending on the

riskiness of each line of its business.”

Fundamentals of Corporate Finance, 3rd edition, ISBN 0-07-553109-7, Richard A. Brealey, Stewart C. Myers, Alan J. Marcus, Stephen A. Ross, Randolph

W. Westerfield, Bradford D. Jordan, pages 421-423.

Page 13: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Siemens

Feb,2004 to Feb,2014

Page 14: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Corporate financial practice conflicts with

rational investor expectations, breeds

‘Financial Crisis’‘Financial Crisis’such as 2008such as 2008

Page 15: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

“....we do not yet havedo not yet have complete and generally

accepted explanations for how financial marketsfinancial markets

function......Mispricing of assets may contribute to financial financial

crisescrises”- 2013 Nobel Economic Sciences

Prize Committee

Page 16: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

Raises questions, ‘Financial Economics’

never asked

Answers those, ‘Financial

Economics’ never could

To prevent ‘FINANCIAL CRISIS’, and transform To prevent ‘FINANCIAL CRISIS’, and transform ‘Financial Management’ from a ‘Cultivated Art’ ‘Financial Management’ from a ‘Cultivated Art’

into a truly ‘Objective Science’ into a truly ‘Objective Science’

Page 17: Right goals wrong tools

Copyright 2014-Rajesh D.Mudholkar, Author, 'The Timeless Essence of Financial Science', http://valueerodingfallacies.blogspot.in

http://valueerodingfallacies.blogspot.in