Financial Theories v/s Real Life

“Like all of life’s rich, emotional experiences, the full flavor of losing important money cannot be conveyed by literature.”
- Fred Schwed

Apparently, most academics in the field of economics have never heard the quote or known the feeling. How else can you explain why they come up with all kinds of theories, and yet we keep lurching from financial crisis to bubble to collapse?

Take one of their favourite recommendations/theories: diversification and buying securities (bonds, stocks etc) that are not correlated. Like all theories, they don’t get into the details of how to identify whether the securities you buy are correlated or not. After all, if they had spelled out the details, we’d never have had the financial crisis of 2008 where investments banks (and even a few countries) all ended up owning highly correlated securities and had to be (and still are being) bailed out.

To me, it just sounds like talk. It sounds good in theory, but nobody has a clue on how to apply it in real life. And once things go wrong, the academics are right there to tell you what went wrong. C’mon guys, everyone is a genius after the fact! Well actually, even after-the-fact analysis these guys do may or may not be right: after all, finance and economics aren’t physics or chemistry where one can try out the experiment again with the suggested changes to see what happens. There are just too many variables.

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