It is my pleasure and privilege to address the 2009 graduating class of Tsinghua University and Macquarie University. I am a banking supervisor and I also serve as a visiting professor in China Academy of Social Science. As I run the training programs for supervisors in our agency, I have naturally developed some modest expertise. And as a result, I occasionally have invitations to talk to graduates and most particularly mid-career students in Tsinghua. Like the faculty members here, I talk about my area of specialisation. And once you are on the stage, it does not seem to matter so much who the audience is. In fact, more often not, it is only after the class that while walking on the campus back home, I have come to feel the privilege of teaching of a congregation of the very best learning breed in this whole country. Tsinghua is the best academic institution in this country and only the best of the very best have the chance to study here. Leveraging with /working together with Macquarie University, Tsinghua is now becoming international.
This sense of feeling privileged also has something to do my humble roots. I got my first degree in English and geology in Wuhan Institute of Geology, the successor of Beijing Institute of Geology. It was out of a concern for a possible attack by the Russians that the Institute was moved from Beijing to Wuhan in 1970s. In retrospect, I can say that the university environment was pastoral and bucolic. On the way from the dormitories to the teaching facilities, we passed the paddy rice field with farmers ploughing the fields with cows. And on a raining, walking to the classroom was almost like a trench war. The fashion among girls at that time was a pair of coloured rubber rain boots, high up one’s knees. And it sound funny to some that at that time many of our faculty members earned their tenure not because of academic achievements but because of their working class family background, the most proud social class in those days. I could still remember that there was one very proud student in my classmate. He was proud because he had a brother studying at that time in Tsinghua. For four years, he had cashed in so much credit by just talking about the nitty gritty of his brother’s school life in Tsinghua, even though he almost failed the finals for a couple of times. Believe it not.
Now let me turn to something more professional and less trivial. We all go to school to get a good education. And in your case, you have succeeded in having a good eduction in corporate finance, financial instruments, and risk management. I am sure that you have spent huge amount of time learning about how to, in all these disciplines, to identify, measure, monitor and control risk or uncertainty. However, in real life, managing risk or uncertainty is much more complicated than what textbooks suggest. There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.
Let skip known knowns and talk about known unknowns and unknown unknowns.
Many people continue to stress in the need for more fundamental quantitative risk analysis. Sure, lots of analysts have run simulation models showing that many sub-prime mortgage customers wouldn’t be able to make their payments after the low fixed rate expired. Indeed, Monte Carlo simulations were used at Lehman Brothers, Merrill Lynch, AIG, Bear Sterns. But a lot of people, especially senior managers glaze over when presented with reams of figures and endless charts. Indeed, the collapse of Lehman Brothers, Merrill Lynch, AIG, Bear Sterns, Washington Mutual, and Wachovia can be better blamed on corporate greed, lax oversight, and out of control executive incentive plans. All these are difficult to quantify. That is an indication of the limitation of quantitative risk analysis which tells us only part of the story.
Again, the public sector institutions face the similar challenge in managing the economy. Uncertainty--about the state of the economy, the economy’s structure, and the inferences that the public will draw from policy actions or economic developments--is a pervasive feature of monetary policy making. Therefore, in contrast to his predecessor Alan Greenspan, Bernanke argued strongly that＂The fact that the public is uncertain about and must learn about the economy and policy provides a reason for the central bank to strive for predictability and transparency, avoid overreacting to current economic information, and recognize the challenges of making real-time assessments of the sustainable level of real economic activity and employment,＂. Therefore he concluded most fundamentally, the discussions of the pervasive uncertainty that we face as policymakers is a powerful reminder of the need for humility about our ability to forecast and manage the future course of the economy.
Finally, in real life, beyond uncertainty there is a lot of unknown unknowns. In the word of Nicholas Taleb this is the black swan. This refers to a vast body of information that we are not aware of, and even worse, are not aware that we are not aware of it.The term black swan comes from the 17th century European assumption that ’All swans must be white’. In that context, a black swan was something that was impossible and could not exist. In the 18th Century, the discovery of black swans in Western Australia metamorphosed the term to mean that a perceived impossibility may actually come to pass.
The black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives as well as the financial crisis that is still going today. We human beings do not tend to acknowledge the phenomenon of black swans until after they occur. Part of the answer is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to act on the impulse to simplify. For ages, we have fooled ourselves into thinking we know more than we actually do.So let us agree that there is a lot of more out there that we need to learn. Learning is not an academic process. It is a lifelong process that doesn’t end when school ends. So far, you have successfully managed your first stage of transformation, like that of a butterfly, a beautiful, filmy creature that glides about the sky, bringing joy to our hearts. I understand what you have gone through and how you have struggled to reach where you are. I am sure that now you feel confident with your new self, and like the butterfly, you will fly free, a living jewel fluttering about the skies in the great expanse.
Congratulations, the graduating class of 2009 of Tsinghua University and Macquarie University.