Читать книгу Dinosaur Derivatives and Other Trades - Josse Jeremy - Страница 7

“Money speaks sense in a language all nations understand.”

– Aphra Behn (1640–1689)

“Let us all be happy, and live within our means, even if we have to borrow the money to do it with.”

– Artemus Ward (1834–1867)

“Crito, we owe a cock to Aesculapius; please pay it and don't let it pass.”

– Socrates' last words (c. 470 BCE–c. 399 BCE)

It is fair to say that finance is a serious matter, whereas riddles are often frivolous. Money, on the other hand, can be very superficial, whereas philosophical puzzles are profound.

Finance is viewed as a dry subject, engaged in by men and women in dark suits who toil away for innumerable hours in large, box-like buildings. What is finance, after all? It's the counting of numbers, isn't it? Or the practical investing of money, providing loans and capital and settling of accounts to ensure proper payments of due bills. Finance, if seen this way, is essentially for the straight shooters. It's a serious occupation reserved for those whose minds are embedded in the settlement of everyday, practical affairs.

It would seem utterly contradictory then, to claim that every aspect of finance involves some philosophical puzzle. How could a subject as “dry” as finance be related to philosophical matters? Philosophy reminds us of the strangest things in life, the paradoxical. Don't philosophers deal with moral purpose? They dwell on those deep contradictions and inconsistencies in humanity that seem inexplicable. Philosophical riddles take us to the heart of ancient Greek thinking or to the most ethereal topics involving logic and semantics. It is a subject that is seemingly mastered by only the least practical of thinkers, those whose minds can wander far from mundane concerns. Surely, we would never imagine that a person contemplating deep philosophical paradoxes could be the same individual who carefully reviews the accruals and payments of a company.

In the conventional view then, the discipline of finance is the polar opposite of philosophical thought.

In this book, I hope to prove to you that this view is profoundly wrong. Not only that – it is a view which shows a fundamental misunderstanding of the business of finance and perhaps, also, a misperception of the essence of philosophy.

Deep within the financial world lie a series of puzzles. Below the apparent formalities of the world of finance, there are quandaries involving the unexplained. There are paradoxes involving hypocrisy, double standards, dilemmas, and contradictions that border on the absurd. These are all the things I am particularly curious about.

Now it's true that some of the most serious financial practitioners do not spend much time contemplating deeper philosophical challenges. But then, the same goes for most of us. I do not spend much time contemplating whether the chair I am sitting in really exists or not. Yet that obscure philosophical problem is always there, every day, whenever I sit in my chair. And so it is with the paradoxes underlying finance.

This book consists of a set of particular stories in the philosophy of finance. If all goes well, I hope these stories will give you an inkling of this world of financial curios. In other words, here are case-by-case studies of some basic concepts in finance that take us deep into the territory of paradox.

The sources of these stories are various. Some are drawn from my own 20-plus years of real-life experience as a financial executive in the banking sector. Others are famous stories or legends of old. A few tales are entirely apocryphal, a way to deal with abstractions by presenting examples. But all, however odd or enigmatic, are intended to give you some perspective on what's going on “inside” the world of finance itself. Each story is, you might say, a thought experiment in the laboratory of the philosophy of finance. Our objective is to journey over the metaphorical financial rainbow, or perhaps go with Alice and explore the other side of the financial looking glass.

Now, let me also say what this book does not intend to cover. There is already a very large body of mainly academic writing on the so-called philosophy of economics. This writing tends to be technical. Typically, the academic approach covers issues of political philosophy and sociology, demonstrating their impact on economics. (One of the burning issues seems to be the question of whether economics is a science on a par with the natural sciences.) Many of the issues addressed by academicians are couched in very formalistic terms, and their theses are developed through citations of different historical schools of economics, philosophy, or political theory.

This book takes another route. My aim is to show what we actually mean when we're talking about some very basic concepts in finance. Each chapter will begin with the story and then go on to analyze what the story might tell us about that fundamental concept. I agree that our understanding of these puzzles and questions needs to be informed by some knowledge of the history and substance of philosophy, economics, and social/political theory. But here I have no intention of engaging in some sterile academic exercise in technical or analytical philosophy. Nor am I going to introduce analyses typically found in academic finance journals. The point is to bring out conceptual conundrums and moral dilemmas that touch all of us in the world of real finance.

What I've found is that many people in the finance business do sense these philosophical puzzles whispering in their ears as they go about their daily business. In fact, I suspect that all of us, as we deal with everyday, personal financial concerns, have some sense of the paradoxical soup lying just below the surface. But you can't spend a lot of time mulling over the paradoxes when you have income to produce, investments to make, and bills to pay. Dwelling on conundrums would be seriously distracting if it interfered with settling your accounts.

To put it another way, the problem of the existence (or not) of the chair I am sitting in seems an absurd problem – not only pointless but perhaps even meaningless. Similarly, it might seem like the questions I pose in this book are unrelated to what we would call your real financial life. But anyone confronted with a financial problem will tend to find some of the challenges they have are directly related to the questions I am addressing in this book. If you are facing some financial vexation, you don't necessarily see the issue in overtly philosophical terms, let alone perceive some theoretical paradox at the heart of your problem. Nevertheless, a financial challenge often leaves us with an uneasy sense of tension or even frustration. We have to recognize that certain assumptions are being made or that many financial concerns involve some form of moral inconsistency.

One of the most basic questions in the philosophy of finance is what we ultimately mean by “value.” So, that's where this book begins. What does it mean to say an asset has value? Indeed, why does anything have any economic value? And if we ascribe a value to a certain asset, what does that say about our attitudes? How does our valuation of assets affect our behavior and morality? Knotty questions. So the first chapter deals with the peculiar story of an option to buy…an extinct dinosaur. What would you do if you were attending a live auction to buy or sell such an option (for “value”)? Under what circumstances would people pay good money for a dinosaur derivative?

Then I want to move on to the anxiety we feel when confronting a financial problem – a feeling that results from what we call “doubt” or “risk.” We can never be quite sure whether things may, or may not, turn out in the way contemplated when undertaking a particular financial exercise, or calculation, or plan, or investment.

A better word than “doubt” is “uncertainty.” And this is where finance and philosophy really converge. Volumes have been written, in the great pantheon of philosophy, on the question of how we can be certain of anything. (My “chair problem,” for instance: how can I really be certain my chair exists, even though I can feel it supporting my backside?) In finance we are plagued with uncertainty, and it's no abstraction. While philosophers and academicians may write at length on the topic of certainty without disrupting the general ebb and flow of goods and services, those actually involved in finance know all too well how uncertainty creates real-life events, including catastrophic economic collapses affecting whole societies worldwide.

Of course, in finance most questions about uncertainty have to do with the future. We're concerned about managing the risk associated with uncertainty, or beating others by using our predictive capabilities. So the second chapter will analyze this concept through a very famous story about “prophecy” – namely, the story of Joseph from the book of Genesis. Here was a man (prophet) who apparently predicted firstly seven good years, then seven bad years in the Egyptian economy. But Joseph's predictions were quite unique for he was not “uncertain” about this economic future. According to the story, God had already informed Joseph what the outcomes would be.

By looking at Joseph's ability to circumvent doubt over the future, and seeing the way he used his privileged economic knowledge, we glean some insights into the nature of “uncertainty” and “certainty” itself. As we all know, there are in practice, limits to human foresight.

Next, the “contract” – perhaps the most basic building block in finance. What, really, are contracts? Why do business people so often argue and dispute their terms? In the third chapter, I will describe an old English legal case in the law of contract, just to give you a sense of what a contract may really be. This, in turn, opens a window on some very curious, logical puzzles concerning what it actually means to follow the terms – or “rules” – of a contract. Far from being set in stone, the rules in a contract can almost always be interpreted in such a way that any pattern of behavior (any pattern whatsoever) can be shown to be in conformity with those rules. No wonder then that hugely divergent interpretations of the terms of a contract can arise. When you mix that insight with good old human self-interest, it goes a long way toward explaining why the business world spends its time litigating, lying, and fighting over the terms of many business deals.

“Financial instruments” are themselves a form of contract. So we look next at the concept of a financial instrument itself. In Chapter 4 I tell an antique tale about some of the earliest forms of financial contracts and the old prohibitions on usury. All financial instruments are merely peculiar interpretations of contracts, or reconfigurations of contracts, to achieve certain ends. They are invariably a form of “legal fiction.” And yet, though quite artificial in design, they can sometimes produce important economic benefits.

Another peculiar philosophical question in finance concerns the very nature of “financial innovation,” the topic of Chapter 5. Why is financial innovation important and yet also potentially so dangerous and open to human distortion? Financial innovation is, in effect, the invention or discovery of new financial instruments and contracts. But when a new financial product is developed, or a new theory in finance is advanced, is that really the equivalent of a scientific discovery or a new invention? It certainly doesn't feel like that. Perhaps it is more like the development of a new theory in mathematics, though that doesn't seem quite right either. This is an issue that has manifested itself throughout economic history and even (as we shall see) in the growth of the American railway system in the 19^th century. Meanwhile, it has still more direct relevance to us today. I will argue it gives us a concrete insight into one of the often neglected causes of the 2007/8 credit crisis.

Then, on to another core concept (Chapter 6): what really is an “ownership right?” This is a question that moral and political philosophers have brooded over for centuries. I'm going to approach it from a slightly skewed angle by considering the story of Faust and his pact with the Devil. Faust was a trader himself: he traded certain moral rights for material rights. So, what are these material rights? What, for example, does it mean to own a stock? And what would happen if we too could enter into a Faustian-style pact? Suppose we could trade, say, our political right to vote for rights to more money? Could it be that, in fact, we all do something like that in our everyday business activities? Do we trade away certain rights for cash?

We must, of course, also ask “What is money?” While we know that money is just a means of exchange, today's electronic money has taken on a form that makes it uniquely incorporeal and replicable. In Chapter 7 I tell the strange story of a computer hacker who succeeds in breaking into the accounts of the major banks of a nation. What I want to imagine, however, is not a case of theft. Rather, what would happen if our hacker took nothing at all from anyone's accounts? Suppose that instead, he filled everyone's accounts with large quantities of electronic money. Should we consider him a great philanthropist? So it would seem. Instead, we will find that his largesse is more damaging than if he had stolen in the first place. Nor is this purely imaginary. What I wish to portray is a picture of our modern (IT-based) money supply and inflation. This story also gives some perspective on the latest financial buzzword, “quantitative easing.”

Let's then touch on the whole issue of distributive justice. Huge profits can be made in lucky (or clever?) financial dealings – so how should these profits, and indeed all our finite resources, be shared among a nation? How do we manage wealth inequalities? This is a very hot issue today post the credit crisis and I want to analyze it via the question of “What is taxation?” However, my focus will not be taxation as it is today, but taxation as it might (perhaps) have been in the lost city of Atlantis. Tracking the political economics of that mythical land may give us some insights into today's polarized debate on taxation policy and wealth re-distribution.

In Chapter 9 it's time to shift to the darker side and look at finance when it goes wrong. In order to address the question of “What is fraud?” I will tell a true tale of a brazen fraudster who destroyed multiple financial businesses. (The saga is from my own personal experience – though fortunately, I was a mere spectator, not a participant.) What is the nature of a fraudster? Often, we tend to imagine a “normal” individual who has gone astray or fallen on hard times. But there are those who are way beyond that. I'm going to pose the strong possibility that there really are white-collar “psychopaths.” These are people who do stuff that most of us would never do, and they do it consistently. For this select demographic, I question whether any sort of financial regulation will ever provide a foolproof barrier against wrongdoing. In fact too much regulation may make the fraudster's life easier, not harder.

Which then brings us to the nature of “financial regulation” itself – addressed in Chapter 10. Truth to tell, much of the Western financial world is what I would call “regulated to death.” People might not agree whether this is a good or bad thing, but certainly in the U.S. we have one of the most complex bodies of financial regulation in history. With so many rules, how can we see which rules are effective and which unhelpful? The story I tell in this chapter focuses on one of the last remaining vestiges of a truly unregulated financial environment – the Fine Art market. This is the sole remaining Wild West frontier. In this truly bizarre landscape of financial freedom, I see the upside of an unregulated market but also the dubious practices and double dealing inherent in the business. This is a unique world where anything is possible: pigs fly, there are two moons, and nothing is kosher. We really do need effective market and financial regulation, but is modern financial regulation, with its micro-managing tendencies, undermining its own purpose and efficacy?

Finally, there is the “end game” in finance, which is at heart another conundrum; “What is bankruptcy?” Here again I will dip into my own financial practice and tell a tale of one of the most curious modern financial restructurings I have ever witnessed. This all-too-true story concerns the bankruptcy and reconstruction of a large asset finance business that had became mind-numbingly complex. Once this firm entered a period of distress, it revealed such a circular array of financial flows that it was hard even to contemplate a rational resolution. So why are financial institutions so vulnerable to collapse and how does “debt” feed that vulnerability? And to what extent is modern financial complexity so overwhelming that it exceeds our human capacity to manage large, inter-related (and international) financial institutions?

When all is said and done, we'll see that perhaps it all comes down to a curious computer game or simulation. I'll touch on that at the very end. And childlike though it is, it seems, nevertheless, to capture many of the themes of this book. For the more we think on the core financial concepts in this book, the more we will see they are all (or mostly) linked by a single chain of thought and causality. It is a conceptual chain that I think, runs through much of the abiding preoccupations within the money world today.

And here we arrive at the heart of the conundrum. Far from being the pursuit of dark-suited professionals in box-like towers, finance is, after all, a living and breathing subject that we all contend with in our daily lives. True, the great adventures in finance take us on journeys to lands filled with curious trades and unlikely forms of commerce. Yet what we ultimately find is that none of us can escape the philosophical and social riddles that are embedded in all our financial practices. As it turns out, the puzzles are not hidden away in distant rooms of commerce or financial ivory towers. Instead they are woven into the very fabric of ordinary social life.