Charles Martineau

Back in 2009, I cre­ated a blog called Invest by Sim­plic­ity in order for me to do some “exper­i­ments”. It is still on and I won­der whether I will keep it alive or not despite the fact that I don’t post any­thing. Nonethe­less, I did a blog post enti­tled “CFA… becom­ing useless?…no more value?” on of the rel­e­vancy (if we can say such a thing) on whether the CFA des­ig­na­tion had any value and a year later some peo­ple still com­ment on the blog post. A major­ity seem to ques­tion the value of the CFA and other see great ben­e­fits to the CFA des­ig­na­tion. I ques­tioned the value of the CFA based on the pop­u­lar­ity of the des­ig­na­tion and on the learn­ing materials.

Pop­u­lar­ity = standardization?

Still today, if I am not mis­taken, the pop­u­lar­ity of the CFA is still grow­ing (maybe less due to the finan­cial cri­sis) and no one would dis­agree that being pop­u­lar is a bad thing! Let’s face it; what­ever we do in life, if it has pop­u­lar sup­port we would be all happy. In the case of the CFA des­ig­na­tion, being more pop­u­lar improves the edu­ca­tion level of many and increases the rev­enue of the insti­tute which leads to greater resources avail­able for the institute’s mem­bers. How­ever, there seems to be a bad trend in edu­ca­tion when a des­ig­na­tion or a par­tic­u­lar degree gets more pop­u­lar. What we see in the increase trend of pop­u­lar­ity in edu­ca­tion is the greater depen­dence on stan­dard­iza­tion. Stan­dard­iza­tion man­i­fests itself, in part, in a mul­ti­ple choice for­mat exams. No room for cre­ativ­ity what­so­ever and it is all about learn­ing every­thing by heart and puke it back on exam day. Is this the proper learn­ing method? Every­one knows that the best classes that we took as a stu­dent where the ones we actu­ally felt like we learned some­thing. Have you noticed that these courses rarely involve any mul­ti­ple choice exams? They were more essay base exams with room for cre­ative answers and out­side the box think­ing or heavy projects where pro­fes­sors chal­lenge stu­dents on the basis of class mate­ri­als with room for the stu­dent to explore on its own and incor­po­rate its own per­spec­tive and find­ings with the class mate­ri­als. Now let me say that I have no idea what the CFA exam looked like 30 or 40 years ago but I am quite sure that there was not a such heavy stan­dard­iza­tion mul­ti­ple choice based exams – two exams (level 1 and 2) of 6 hours each of mul­ti­ple choice ques­tions is quite ridicu­lous to me. When the pop­u­lar­ity of a pro­gram increases, schools and des­ig­na­tions incor­po­rate more stan­dard­iza­tion learn­ing because it is easy and more impor­tantly faster to grade. It is also eas­ier to attract an increase demand for a pro­gram or des­ig­na­tion because stan­dard­iza­tion stud­ies (if we can say such a thing), to the eyes of many, is way eas­ier to go through than a pro­gram that requires cre­ativ­ity. Have you ever real­ized that peo­ple rather study what can be crammed because they know the “to cram” method rather than being cre­ative? Despite the fact that “cram­ming” is not nec­es­sar­ily easy because it requires a lot of time it is still the pre­ferred type of exam by some peo­ple because they know that they must study what it is in the box which is finite rather study­ing how to cope with the envi­ron­ment inside and out­side the box which is way unpre­dictable and requires cre­ative mind to cope with infinity.

Despite the increase of pop­u­lar­ity, I was told that the CFA made the cut­off point to the pass each CFA level way tougher. The CFA has no choice in order not to lose its “let­tres de noblesses” – the actual worth the designation.

I know that the CFA level 3 is not a mul­ti­ple choice exam how­ever what is expected from CFA can­di­dates is to apply tools of the two pre­vi­ous stan­dard­iza­tion exams to answer the essay base ques­tions. Noth­ing against level 3 but is there room to be cre­ative? Can a can­di­date answer ques­tions with tools not taught in level 1 or 2? I am not sure but I doubt… What is expected from can­di­dates is that the answers con­form to what they have crammed in their heads in level 1 and 2.

Again, the CFA is not the only pro­gram that suf­fers from the neg­a­tive con­se­quences of the increase in pop­u­lar­ity. I am 90% fin­ished with my Mas­ters and with aca­d­e­mic infla­tion and in order for uni­ver­si­ties to gen­er­ate more rev­enue they increase the capac­ity level of stu­dents within a course. At my uni­ver­sity, stu­dents are not even required to do a the­sis! In my pro­gram, 10 to 15 per­cent only writes a the­sis whereas other stu­dents sim­ply take more courses (which are use­less because courses helps stu­dents to choose a topic for their the­sis) and do a super­vise project – basi­cally an intern­ship of four months (a mix of both would be pre­ferred). Some Master’s courses are actu­ally huge, sim­i­lar to nor­mal under­grad­u­ate courses where I see pro­fes­sors hand in stan­dard­iza­tion form of test­ing! It dis­gusts me and this trend won’t dis­ap­pear any­time soon cer­tainly with the world pop­u­la­tion hav­ing more access to Uni­ver­si­ties. I am not sug­gest­ing that I wish there would be less peo­ple hav­ing access to uni­ver­si­ties but uni­ver­sity prac­tices must change!

Are my con­cerns on the stan­dard­iza­tion process of the CFA any rel­e­vant? Let’s face it; it takes some­thing like 3 to 5 year (if I am not mis­taken) of work expe­ri­ence to have the actual CFA des­ig­na­tion. Some might won­der what are my con­cerns are  when you need real work expe­ri­ence to have the des­ig­na­tion – who cares about the stan­dard­iza­tion! Well I care because the CFA exams, the way they are con­ducted today, are just sim­ply use­less. Will you actu­ally learn any­thing from cram­ming exam mate­ri­als? For peo­ple with no finance or eco­nomic back­ground, the CFA may be quite ben­e­fi­cial for them to learn the field of finance and eco­nom­ics. But again, is cram­ming what they should be doing? Major waste of time and cash! Stan­dard­iza­tion of learn­ing is a bur­den for an entire soci­ety. Learn­ing is not made to be stan­dard­ized but to be explored from many dif­fer­ent per­spec­tive and more impor­tantly from a trial and error of apply­ing the­o­ret­i­cal mod­els, for­mu­las, and knowl­edge to solve var­i­ous prob­lems. Stan­dard­iza­tion learn­ing, to me, tries to sell what is the “truth” or the “best way” to solve prob­lems. No one has the truth. We can’t con­form prob­lem solv­ing. Prob­lem solv­ing evolves through time and the way to solve future prob­lem is quite unpre­dictable and only through trial and error can we solve prob­lems. Noth­ing against the insti­tute itself but there is major room for improve­ment. But before I talk about a poten­tial way to improve the CFA des­ig­na­tion, let’s move to my sec­ond crit­i­cism: the actual mate­r­ial of the CFA exams.

What’s being taught – is it any good?

There are some great mate­ri­als taught in the CFA exams such as finan­cial report­ing, ana­lyz­ing finan­cial state­ments, under­stand­ing more com­plex finan­cial prod­ucts, and to some extent ethics. Though, I have some issues with the the­o­ret­i­cal base of eco­nomic and finan­cial val­u­a­tion (risk, port­fo­lio man­age­ment, stats, etc.) There have been tons of crit­ics dur­ing the finan­cial cri­sis of 2008 on the past devel­op­ment on the­o­ret­i­cal finance. Effi­cient mar­ket hypoth­e­sis and tools such as Value-at-Risk have been neg­a­tively pointed with legit­i­mate rea­son. I am per­son­ally dis­cour­aged when­ever I see risk man­age­ment using Gauss­ian (nor­mal) dis­tri­b­u­tion. Despite my dis­agree­ment (to some extent) with many appli­ca­tion of the­o­ret­i­cal finance like VaR, the belief in effi­cient mar­kets, the idea that vari­ance is finite (so wrong!), and val­u­a­tion tools such as Black-Scholes-Merton, I still think that it is nec­es­sary for any­one in the field of finance to know and under­stand these and other the­o­ret­i­cal devel­op­ment of finance. Again, as pre­vi­ously said, no one as the truth and con­se­quently we must learn and under­stand what led to a cer­tain devel­op­ment the­o­ret­i­cal model, how it was proven wrong or if not yet fal­si­fied the lim­i­ta­tions of these mod­els, and how risky they can be if applied at 100% (despite our igno­rance and inca­pac­ity at eval­u­at­ing proper risk devel­op­ment in the future).

Now, I have two issues con­cern­ing the learn­ing mate­r­ial. At first, the­o­ret­i­cal tools that were proven wrong are still taught as if it was the way to go in finan­cial val­u­a­tions or risk man­age­ment. I see no form of debate on the proper usage of these tools, why some were proven (dead) wrong, their lim­i­ta­tions, their crit­ics, and how they can be improve. I would like to see this for instance: Black-Scholes-Merton option pric­ing model was shown to be quite wrong and dan­ger­ous in var­i­ous con­texts (i.e. the fail­ure of Long-Term Cap­i­tal Man­age­ment) but why do War­ren Buf­fett value its put option posi­tion using Black-Scholes-Merton?

Sec­ondly, Ben­jamin Gra­ham is prob­a­bly “flip­ping” in its tomb­stone every time he hears about the CFA. He’s flip­ping because peo­ple are not taught what they are sup­posed to be learn­ing. He was, in a way, one of the founders of the CFA because he wanted a pro­fes­sional des­ig­na­tion to prop­erly dis­tin­guish between those who, at their best, prop­erly advise investors, value firms, and most impor­tantly under­stand the lim­i­ta­tions of people’s ratio­nal­ity, unex­pect­ed­ness, and igno­rance of the stock mar­kets. I would make CFA can­di­date study Secu­rity Analy­sis and Intel­li­gent Investor (the two famous books of Gra­ham). For those who read both books must have noticed some­thing great about the val­u­a­tion tools of Gra­ham. First, they are very sim­ple and haven’t you noticed that Graham’s per­spec­tive and tools are sim­ply (in the best pos­si­ble way) to put the odds in your favor to value firms and to max­i­mize the pro­tec­tion of an investor from unex­pect­ed­ness risk with real­is­tic assump­tions (if any)? He notices that humans are ratio­nally bounded, infi­nitely igno­rant, and mar­kets are unpre­dictable and con­se­quently devel­ops tools and a per­spec­tive to finan­cial mar­kets that takes this into account. Can some­one con­firm any Gra­ham analy­sis in the CFA exams? I am sure there are but I have the per­cep­tion that they are not taught prop­erly in the sense of that they are mixed with proven wrong finan­cial val­u­a­tion mod­els. I know that the CFA likes to pro­mote the idea of Gra­ham was behind the CFA cre­ation but are they fully exploit­ing Graham’s ideas?

Sug­ges­tion

CFA suf­fers from the same prob­lems of today’s uni­ver­si­ties but since the CFA is a unique insti­tute I believe that they should have more flex­i­bil­ity at mod­i­fy­ing its cur­ricu­lum. There­fore I have a poten­tial sug­ges­tion (or we may call this an idea) that could spark some inno­v­a­tive process on how to improve the process for any­one to actu­ally learn some­thing on its way to the CFA des­ig­na­tion (assum­ing that the gov­er­nance behind the CFA is will­ing to make less money because I expect a drop in the demand from my sug­ges­tion — which I doubt but anyhow).

First, I would have one exam (really tough) which would be like CFA level 1were there would be no mul­ti­ple choice ques­tions (or maybe a 10% mul­ti­ple choice on some sim­ple com­mon sense / knowl­edge ques­tions that does not require any cram­ming) with essay based ques­tions on what the CFA wants stu­dents to know in level 1 and 2 but with the adjust­ments that I pre­vi­ously men­tioned . Make stu­dents go beyond what’s within the box though I have to admit, it is not easy. Plus it is really hard to grade essay based ques­tions right? It is costly in time and money. I have to say that I don’t know how I would make it eas­ier for graders but there must be a solution.

Now for level 2, I would make stu­dents go for a mas­ter degree in eco­nom­ics or finance (any sub­field in econ. or fin.) and make them write a the­sis to be sub­mit­ted for pub­li­ca­tion to the CFA jour­nal (if there is such a thing but I believe there is). This would force stu­dents to do under­stand the lim­i­ta­tions of finan­cial mod­el­ing and sta­tis­ti­cal tools.

For a level 3 exam, it would sim­ply be rel­e­vant work expe­ri­ence (3 to 5 years about) and then after com­plet­ing all three level I would grant the des­ig­na­tion but I would add like a “pre­mium” CFA holder des­ig­na­tion if some­one, after like 10 or 15 years of work expe­ri­ence finds a way to pro­mote greater ethics or trans­parency (some­thing in this genre) in the field of finance.

Con­clu­sion

Wow, this was a long post. Now many might prove me wrong on many of my crit­ics or sug­ges­tions there­fore please go ahead and blast me! I might have assumed (wrongly) many things and if I you think I am com­pletely of track – let me know! Wait­ing for com­ments (or jabs)!

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Below is a pre­sen­ta­tion by Sir Ken Robin­son at the TED Con­fer­ence 2006 on why school kills cre­ativ­ity. It has noth­ing to do with the CFA but you’ll under­stand my wor­ries behind stan­dard­iza­tion.