June 9, 2017
Editor's Choice: The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai, Houghton Mifflin Harcourt, 240 pages, Hardcover, May 2017, ISBN 9780544911130
This is the second week in a row I’m reviewing a book that references the 1988 movie Working Girl. Jennifer Romolini used it in Weird in a World That’s Not to point to the lack of good female role models and the shortcomings of how women bosses are portrayed in Hollywood. In this week’s book, The Wisdom of Finance, Mihir Desai brings it in to lend insight on the nature of mergers and marriage. If that sounds dry, it is a chapter that also touches on songs by Charlie Parker, Ray Charles, and Kanye West, dowries in fifteenth-century Florence, and the failed merger of AOL and Time Warner. And it’s all brought home with the story of the 1926 union of General Motors and Fisher Body, and the dissolution of a 100 year partnership between Ford and Firestone. Trust me when I say these are dramas of the highest order. “For economists,” Desai writes, the GM/Fisher story is “Anna Karenina, Middlemarch, and Jane Eyre all rolled into one.”
The great conceit of The Wisdom of Finance is that it is just as likely, or even more so, to turn to novels like that than to business history in articulating the finer points of finance. He does it all in the service of humanizing the subject, to make the point that “there is great value—and there are great values—in finance” and that they need to be reclaimed by those practicing it:
More than regulation and outrage, fixing finance requires practitioners to return to the core ideas, and ideals, of finance—which can help them ensure that they are creating value and not extracting it. By linking those core ideas to literature, history, and philosophy, we give them deeper resonance and make them more resistant to corruption.
So, if the idea of finance bores you, perhaps you’d like to know the role insurance may have played in sparking the French Revolution, or how it may have precipitated the decline in allegations of witchcraft. Maybe you would like to learn about the nature of risk from Pride and Prejudice, or about the underlying state of chaos we all live in, and how to manage it, from poet Wallace Stevens—who also happened to have been an insurance executive. It is here you begin to get the sense that the practical and philosophical, that literature and science, are being intricately intertwined.
For Stevens, “imagination is the power of the mind over the possibilities of things” and is the “power that enables us to perceive the normal in the abnormal, the opposite of chaos in the chaos.”
In probability theory, that is called normal distribution. In terms of insuring people, it means that, while you can never know when someone will die, you can determine an average lifespan and use it to pool risk.
What can you learn about options and the importance of diversification from Trollope’s Phineas Finn, from medieval agriculture, or The Wire? What can Shakespeare’s The Merchant of Venice and Kazuo Ishiguro’s Remains of the Day teach us about leverage and debt, about commitment and the bonds that bind us? The answer is, quite a bit.
In addition to showing what the humanities can teach us about finance, Desai draws lessons from finance to inform our humanity. Speaking to the benefits of forming relationships with people that are not like you, he writes:
In fact, the relationships that are most enriching are ones that broaden our perspective beyond our usual experience—those relationships are, in finance terms, “imperfectly correlated assets,” precisely the types of assets that most enhance the portfolios of our lives. … Homophily, or the desire to surround ourselves with like-minded people, is a common social instinct—and one that finance warns against. Yes, it’s easier to be around like-minded types, but finance recommends the hard work of exposing yourself to differences, not shielding yourself from them.
He’ll also reveal how the capital asset pricing model can teach you about the relationships you form in life, and how the principle-agent problem affects our relationships with our children, and even our own childhood. That principle-agent framework, “a powerful lens for understanding the muddle of modern capitalism and the role of finance,” is explored with stories from E.M. Forster’s A Room with a View, Mel Brooks’ The Producers, and a personal story of his mother’s living arrangements after his father passed away.
The Bible’s (rather harsh, in Desai’s view) parable of the talents is used to teach us how value is created and distributed, and what that might mean for how you approach life and use your natural abilities. He balances that harshness with the etymology of the very word “finance,” with a exhortation not to confuse outcomes with our efforts, and a reminder that finance means “living up to and settling one’s obligations.”
It is also a history of remarkable and intellectually romantic characters like Charles Sanders Peirce and Louis Bachelier, men whose ideas were ahead of their time and who died in poverty. It tells the story of Robert Morris, who financed the American Revolution and passed up the opportunity to become the first Secretary of the Treasury (suggesting Alexander Hamilton in his stead) to recoup the fortune he spent during the war, only to end up in debtors prison before the nation’s first bankruptcy law was enacted. In the discussion of bankruptcy, he references Aeschylus’s Agememnon and the story of Arjuna from the Bhagavad Gita, Martha Nussbaum’s The Fragility of Goodness and her take on Euripide’s Hecuba, and what it has to teach us about navigating uncertainty and competing obligations.
The depiction of finance in literature and film includes many more villains than heroes, and there is good reason for that depiction. Success in finance tends to lead to and oversized ego, an insatiable appetite and desire to accumulate ever more. Desai struggles with that, with the fundamental good service finance provides and the attribution error it seems to breed—our tendency to view our financial success is the result of our abilities rather than luck, while we attribute our failures to circumstances beyond our control. To guard against this, he suggests:
I think the best way to insure ourselves against that risk is through works—and the work—of imagination, just as Wallace Stevens suggested.
In searching for a hero, he finds Willa Cather’s portrait of Alexandra Bergson from O Pioneers! Reflecting on a line from that book, that “There are only two or three human stories, and they go on repeating themselves as fiercely as if they never happened before,” he writes:
For Cather, there are ultimately only a few stories that all of our lives end up resembling. Some of them, as we’ve seen, are tales of hollow accumulation and insatiable desire. Some are tales of heart and hard work. It is up to us to choose amongst them wisely. I recommend Alexandra Bergson’s story.
The stories Mihir Desai weaves together leave you feeling hope for our future. It bridges the barrier between art and science, between technical knowledge and human understanding. It reminds us that finance is at the heart of what we’ve come to know as the American Dream, and revives the argument that we must puts values back at the center of value creation to continue to finance that dream.
About Dylan Schleicher
Dylan Schleicher has been a part of the 800-CEO-READ claque since 2003. Even though he's stayed on at the company, he has not stayed put. After beginning in shipping & receiving, he joined customer service and accounting before moving into his current, highly elliptical orbit of duties overseeing the ChangeThis and In the Books websites, the company's annual review of books, and in-house design. He lives with his wife and two children in the Washington Heights neighborhood on Milwaukee's West Side.