11 October 17
AN EVENING WITH MIHIR DESAI ON THE WISDOM OF FINANCE
I recently attended a dinner with Harvard Business School Professor Mihir Desai in Cambridge. At the end of an enjoyable evening, Desai talked about his latest book, The Wisdom of Finance, setting us on a journey to discover humanity in the world of risk and return. The next day, I bought the book at the Harvard Coop to read it on my way back in France. Here are my insights.
The opening sentence—“This book is not about the latest study that will help you make money in the stock market…”—encapsulates much of what is to follow. As the titles promises, Desai embarks upon a great crusade for finance to recover its letters of nobility. Desai proposes to rely heavily on the humanities to bring clarity to how finance works and why it is important. The task does not seem to be easy! After all, the industry has been repeatedly portrayed as perverted and deceitful; financiers, once placed in pedestal, are lately blamed for hollow accumulation, outsized egos, insatiable appetites and risk-addicting practices. At the outset, I am therefore quite puzzled on how the humanities could convincingly become a shining light on finance.
After reading a few pages, I become persuaded that finance and humanity may not be so much apart. The compelling central thread holds it all together. Issues in finance derive from some much larger aspects of human experience. The book glitters with a myriad of examples from the literature, philosophy, and arts to offer a thoughtful account of how finance works. Drawing on an astonishing array of sources, Desai paints a richly multicolored portrait of finance, delving into the work of Wallace Stevens, Jane Austen, Aristotle, Samuel Johnson, and James Joyce, among others.
For instance, Desai’s chapter “On Value” begins with a discussion of the Bible’s parable of the talents (Book of Matthew), which tells the story of a master going on a journey who entrusts his wealth in the form of eight talents to three servants. When he returns, he finds that the one to whom he entrusted five talents and the one to whom he entrusted three talents have managed to double them, but the one to whom he entrusted one talent just buried it in the ground out of fear. He rewards the first two and banishes the third. The lesson becomes clear in Desai’s writing: We are endowed with gifts and they are incredibly valuable but we need to know how to effectively steward these gifts in a world entails with risks and uncertainties.
Desai goes on mixing finance and the humanities to create atypical pairings. Jane Austen and Anthony Trollope are guides to risk management. Leverage finds its full meaning through the eyes of Shakespeare, Jeff Koons and George Orwell. The accidental success of Springtime for Hitler in The Producers explains the principle-agent problem. An episode of The Simpsons demonstrates how insurance can create moral hazard.
Inexorably, Desai teases out his key messages on the inner working of finance, points out to the contradictions in the industry, connects practice with our everyday lives. In the final and perhaps most unanticipated chapter, “Why Everyone Hates Finance”, Desai raises the issues of insatiable desires and accumulation of wealth through Tolstoy’s story “How Much Land Does a Man Require.” It leads Desai to postulate an “asshole theory of finance”. And what a theory to stumble into! But, according to Desai, financiers aren’t all inherently bad. There are “tales of heart and hard work,” finance practitioners holding firmly on the core values of humility and social progress. Alexandra Bergson, the heroine of O Pioneers!, a novel by Willa Cather, shows us the way forward. Bergson, a first-generation immigrant from Sweden living in the plains of Nebraska, is portrayed as a skilled risk taker that knows how to use leverage to change the lives of the people around her. Desai seems willing to make an ultimate point. The most significant accomplishment cannot be wealth or status. We need to believe in the power of human stories and “Alexandra Bergson is our ultimate finance hero.”
I definitely enjoy reading Wisdom of Finance. The main concepts—risk, value, leverage, merger, governance, principal-agent theory, bankruptcy…—are creatively covered through the unusual prism of literature and the arts. The book has an admirably wide scope, is well-researched with an extensive list of sources documented in end-notes. In Desai’s writing, the great literary works successfully illuminate the fundamental ideas of finance. No doubt, finance can certainty generate sustainable and long-term economic and social returns for all. Perhaps, the abiding regret is that there is not more of it on Desai’s vision to structure the finance world going forward!