Wise and foolish finance

I’ve thoroughly enjoyed reading The Wisdom of Finance by Mihir Desai. It aims to humanise finance in two ways. One is by pointing out to non-finance folk that finance is dealing with inescapable aspects of the human condition: risk and uncertainty, asymmetric information, values, stewardship for the future. The other is by pointing out to finance folk how finance can and should serve society.

The approach is to draw examples from literature and history – and films and TV shows – demonstrating the way financial techniques absolutely permeate life. The cultural references range from The Simpsons to Jane Austen, Euripides to Bob Dylan, linked to recent events in business and the financial markets. The book starts with the fundamentals: insurance against risk, opening with The Maltese Falcon. It goes on to discuss options, valuation, leverage, and M&A.These chapters have lots of examples that could prove useful in the classroom, as well as being an enjoyable read.

The latter part of the book takes a more philosophical turn, and rather than explaining finance to the uninitiated reflects more on the character of the financial sector and the motivations of those who work in it. What drives people to lead highly leveraged personal existences rather than opting for simplicity (taking leverage broadly to mean building interdependence with other people in order to benefit from their skills or resources – and correspondingly owe them commitments in return)? Is it always possible to identify the ‘right’ course of action in a context such as financial failure or takeovers? Here the book quotes Martha Nussbaum:

“To be a good human being is to have a kind of openness to the world, an ability to trust uncertain things beyond your own control that can lead you to be shattered in extreme circumstances, in circumstances for which you are not yourself to blame. And I think that says something very important about the condition of the ethical life. That it is based on a trust in the uncertain, a willingness to be exposed.”

Needless to say, this almost existential openness is not what comes to mind when we think of finance, of Enron, Madoff, the sub-prime frauds. So Desai ends by pondering – without reaching a firm conclusion  –  what makes so many people in the financial markets so unethical, or at least driven by selfishness and greed. He also gives us a wonderful model of an ethical financier. It is Alexandra Bergson in Willa Cather’s O Pioneers!, the homesteader who borrows to invest and brings the land to life. What a great example. I devoured Willa Cather’s books some 30 years ago and had forgotten about them. It sin’t finance that’s good or bad, it’s people.

The Wisdom of Finance ends with a nice afterword pleading for inter-disciplinary alertness, citing C.P.Snow’s famous The Two Cultures and E.O.Wilson’s Conscilience, both excellent books.

All in all, highly recommended, for those who already know a lot about finance, and those who don’t.

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