#wisdomoffinance

  I read the Wisdom of Finance last year but finally found a chance to write about this amazing book. I think it’s a phenomenal book to encapsulate the fundamentals of finance without the fuss of the wolves of Wall St. Desai says some last words in the end regarding the growing gap between sciences and art and how humanity could have benefited with a stronger coloration between these two disciplines. So, his book attempts to fill the gap with stories from religion, mythology, movies and novels to engrave the big ideas in your head. This approach definitely makes the concepts of finance clear where terminology and abstractness of finance give people a dizzy head usually. Once we take a look at the best sellers in finance and business, the same books appear over and over again like Rich Dad Poor Dad. Unfortunately, many finance books get lost in the glamour of high life in Wall St., or drowned in the mathematics and graphs where people just want to make sense of the highly financialized world. 

  The book goes along with the evolution of finance. I hadn’t thought about randomness and chance like many people when I heard finance. Somehow, we have an image of finance deep in our heads such that it’s very complicated, and these evil geniuses crack the market and make billions. The chapter about chance is such a good chapter, when it talks about Peirce, you witness the birth of modern statistics, probability and sampling and all of these started with… insurance! Charles Sanders Peirce was the founder of pragmatism, a mathematician and logician where he led many developments, the founder of semiotics and the father of the modern statistics and randomized experiments. In spite of his genius, he wasn’t liked much in academia due to his stormy private life so he was struggling to make a living. Later on, his warmhearted friend persuaded Harvard to let him teach about pragmatism in philosophy department. In his first lecture, he talked only about probabilities and insurance companies and “ used calculus to derive profit conditions for insurance companies in how they set prices for their policies” when calculus wasn’t heard of in economy department let alone philosophy classrooms. His friend thought that Peirce finally lost his mind but he was actually laying the foundation of insurance and finance. Peirce embraced chance and randomness since risk is everywhere and can’t be avoided and ignored but can be managed. The insurance was one mean of managing it. The risky nature of world already gave religions ahead since there was no explanations about random events other than divine forces which we couldn't comprehend. It started changing with the rise of rationalism during Renaissance.However, fatalism replaced by rationalism departed at a new brand of fatalism soon, so called nature of laws. Now, we could determine the future by nature of laws and everything had to obey to them. It was indeed an amazing time and recalling my astronomy lectures how Newton discovered unseen planets and Harley told when the comet would pass by must have been magical for the time(still it is). Peirce said it was not enough and randomness was not so random and had a structure in it. Formidable mathematician Laplace asserted that “all events, even those which on account of their insignificance do not seem to follow the great laws of nature, are a result of it just as necessarily as the revolutions of the sun” after statistics and probability glimpse what’s ahead. Desai points out that actually this mathematical approach kind of misses the point of randomness in our life. Some events are so “random” and we can’t make fit them into a trend.Or maybe we don’t know a way to do it yet.

  The risk and business pair guides us through the following chapters. One remark is that how we get stunned by numerous options, and we don’t make a decision at all. He gives an example of seeking the perfect match in marriage and ending up with nothing in the book. I watched one of his interview, and he drew a similar conclusion from classrooms. He’s teaching at Harvard and students do not go ahead and take risks because they are so obsessed with acquiring options and safety nets(definitely not limited to Harvard students but a general attitude in college).Yet, finance requires risk for value creation and financial value is very different than accounting value. I think of the best description of finance in the book is “finance is completely and ruthlessly forward-looking. The only source of value today is the future” and it’s maybe the ultimate truth of today’s tech market.The promise of the tomorrow is what values Tesla more than GM, not the units sold. Neither missed opportunities nor past victories mean nothing in the financial arena. What could kill a matador then? A strike of debt overhang or under leveraged companies, perhaps?

 Debt doesn’t sound nice. From the front page of newspapers calling “the US debt reached X trillion dollars” or “student debt is crushing millennials” to home mortgages, it’s a frightening word for the most including me. Being debt free is a life long financial strategy for people but debt is sometimes the only way to make unattainable attainable. Even though the college tuitions are out of control in the last two decades, loans are the only way for many people to secure their future, for example. The similar case is valid for buying a house. The book talks about debt and how the young US passed series of acts to motivate growth and innovation by shifting the protection from lender to borrower. The government incentives include tax breaks for interest payments so by using debt, companies and individuals are able to “pay less in taxes and to shift value from the government to yourself.” Desai points out that like many companies the individuals are underlevered. Under leverage results regrets whether they are educational opportunities, romantic connections or taking over a start-up. Debt is an amazing lever in right conditions that makes people achieve things otherwise can’t be thought of. As the book cover depicts Archimedes, he famously said “give me a place to stand, and a lever long enough, and I will move the world.” I don't know if Archimedes ever thought debt as lever but he’d be happy that his idea went beyond the physics classroom.