Every year there’s a deluge of white papers and studies published on the world of finance. These papers cover every aspect of finance and some are more valuable than others.
To separate the wheat from the chaff, every year Savvy Investor selects the best investment and pensions papers from the last 12 months. The accolade of “Best Investment Paper 2017” was awarded to the CFA Institute Research Foundation for the paper, “Financial Market History: Reflections on the Past for Investors Today.”
At nearly 300 pages, this paper is a comprehensive look at the history of the financial world. It’s a compilation of 15 different studies by various authors all of whom bring a unique understanding of the topic.
The last study in the paper, compiled by Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley is titled "Financial History in the Wake of the Global Financial Crisis." As the title implies, this study takes a look at how the financial world has changed since the 2008/09 crisis and considers how these changes have impacted investors and investor decisions.
Is Financial History At Risk From Big Data?
The world has changed significantly since the financial crisis. Not only has the financial world undergone an enormous overhaul, but technology and data has changed the way we analyze investments, and uncover investment ideas.
Indeed, today it seems normal to research and buy a stock on your iPhone, in 2008 this device had only been around for a year and was still relatively primitive by comparison.
The prevalence of data will, according to Barry Eichengreen and team, be one of the two ways financial history is shaped going forward. The "greater ease of digitizing archival data will allow financial historians to pursue microeconomic analyses of a sort that were prohibitively costly before. They will be able to construct representative samples of individual households, firms, and banks that can be used to study how financial behavior depends on time, place, and historical circumstance."
The other factor that has changed the way history is considered is "concerns highlighted by the 2008–2009 global financial crisis." The crisis uncovered a financial system that was woefully underregulated, strewn with conflicts of interest and plagued by excessive risk-taking with new, unregulated products. Research into the crisis, what caused it and what could have been done to prevent it, will likely shape financial history for years to come.
"There is likely to be more historical work on both the positive and negative manifestations of financial innovation, the determinants of risk taking by institutional and individual investors, the governance problems of bank and nonbank financial firms, and the causes of stock market volatility."
Eichengreen goes on to argue that one of the reasons why the crisis was so widespread and damaging to the world economy (the largest crisis in 80 years) is because traders and investors came to rely heavily on data "generated in the course of only recent events." In the aftermath the limitations of using such limited datasets became clear.
Put simple, since 2008/09 the financial research landscape has benefitted from a) more data and b) lessons learned during the crisis.
However, Eichengreen and team do not believe that these trends are danger-free. The researchers go on to note that the ability to access Big Data could mean "financial history will become increasingly data-driven, losing sight of fundamental questions and neglecting the historical context in which those data were generated." Moreover, "there will be the temptation to look for data first and to adapt the questions asked to the material available."
There's also a risk that researchers trying to understand what caused the crisis may draw parallels with the crisis of the 1930s, which could skew findings. There were some similarities between the two but there were also major differences (such as shadow banking, derivatives, and repos) and as a result, drawing any close comparisons between the two events may lead to false conclusions.
The report ends with the following advice and warning to researchers operating in today's data-rich world:
"It is the role of the financial historian to highlight not only similarities between episodes but also differences. This means that financial history may not have predictive power: It won’t enable practitioners to predict the next crisis. But it can help them to understand the broader historical context and therefore appreciate what is different this time, after all."
The full report can be found here