May 24, 2010 
I have written about the utility of IR theories before, but neglected one important point, namely that IR theories can help us to make wise investment decisions.
Understanding politics allows us to make good investment decisions. Investment banks today allow you to invest in a structured product which in fact is betting on the urbanization in China. They have identified a political development, extrapolated it into the future, and bet their money on it. It is simple as that. For this purposes, two areas of expertise related to the study of international politics can prove helpful: theory and methodology.
Investment decisions are ultimately based on extrapolations of ongoing developments or the prediction of future developments. IR theories allow us to make the most profound such extrapolations and predictions because they identify the fundamental roots of political developments. The above example of China’s urbanization is very profane, since it is clearly readable from everydays news. Theories allow us to go much further than that. More specifically, they allow us to strategic trends and thus future important topics, world regions, as well as technological and economical areas. This enables us not just to invest where it at a given point in time seems appropriate for many investors, but where these investors have not looked at already, which in fact is resulting in lower investments and higher pay-offs.
These theoretical insights may be looked at with sophisticated methodology, thus further improving the quality of possible investment decisions. As two researchers recently have shown, good methodological work is able to convincingly show the connection between international politics and market developments. A thorough knowledge of the theoretical framework behind certain developments and an appropriate application of the respective methodology should accordingly also enable us to reasonably estimate future developments on the market.
There is nothing suspicious in these claims. Investment banking ultimately is about betting money on future developments. The money will go where the investor sees the most chances and/or fewest risks, which necessarily implies the possibility that one has been wrong. While this is the worst-case in scientific research, it is reasonably fine in the investment business. This also reveals a beautiful side-effect for researchers: While theoretical writings may be worth the academic credit given to them, investment research is worth – well, real money.
Now who should go for the study of investment decisions? Those best suited are those interested in security studies. Security studies is and always has been about the most fundamental explanatory variables in international politics. Those topics in political science and international relations today receiving the most interest and research money, on the other hand, focus on developments that are not related to fundamental aspects of international politics. Examples are studies on the civil society, on international law, but also the study on the international political economy. This inhibits a certain irony. While the student of international security understands where money will be (or should be) floating in the future, many economists are lost in the darkness of econometrics, terminology, and worse.
Interesting approach that certainly applies to the sell-side. However, investment banking, in the classical sell-side definition, is more about telling the right stories than about actually betting money on them. And even if the story turns out to be right, it is far from certain that investors make money out of it: Just look at the internet ten years ago and greentech, or, for that matter, China, now.
While I agree that IR theory could be very helpful in identifying important trends (and thus help the sell-side), I doubt that buy-side professionals, the people really betting their money, can really profit from it, because identifying trends and profiting from them are entirely different matters.
Or am I too sceptical here? Can you give me examples of successful (possible) investments that (could) have originated out of IR theory, or of successful macro investors using IR theory? Very interesting topic imo.
Thanks for your comment. Indeed, I do agree with you. There is probably no direct link between identifying important developments and making money from these insights. As I see it, ultimately, investment banking is about ideas, not reality. The point of my engagement accordingly is more of a personal nature. The above is basically an argument why someone should hire me on the sell side (preferably to a ridiculously high salary).
The important point, then, besides my personal aspirations, would be to establish how the developments identified by IR theories allow us to make profit. I do not have any specific examples. I do know, however, that many people believe in that connection. STRATFOR, for instance, is highly used by banks and investment companies. Thus two insights: First, engaging in the analysis of IR theories and developments is an opportunity to make money in itself – whatever your buyers use the knowledge for. Second, if people believe in the connection, and if investment banking really is about betting on generally agreed ideas, IR-insights might just as well turn into profit. Take my article on Southeast Asia. I am deeply convinced that the region will see some kind of stability in the future because of great power rivalry. Many believe the opposite. This may reflect in market developments.
Where are the constructivists here? Investment banking might be a rare example where ideas turn into real-world relevance.
These are all just vague ideas. I am building up some knowledge on the economic side now, but its scarce, believe me. Nonetheless I think the topic has some potential; for personal or economical use. Remember that my main interest stems from engagement in the sell-side. My comment is as expansive as it is because it was a good opportunity to write some of my recent thoughts down. Thanks for engaging in the topic.