Finally, there are the thanks to family. Some may think this last type of acknowledgment is the stock sentimentality seen in all book acknowledgments. However you only have to write one of these books to realize the real burden it puts on your family. It is both a time and an emotional burden and they have all borne it with incredible equanimity – my boys, Noam, Yonah and Gabriel, but above all, my ever-patient and supportive wife, my pillar – Muriel.
Introduction
“Money speaks sense in a language all nations understand.”
“Let us all be happy, and live within our means, even if we have to borrow the money to do it with.”
“Crito, we owe a cock to Aesculapius; please pay it and don't let it pass.”
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