Wisdom From The World Of Finance.

Think back to 2008. In that fateful year, the global economy crashed dramatically. The stock market sank. The huge investment bank Lehman Brothers collapsed. Many lives were ruined in a matter of months. It was a tragedy, and the blame lay squarely on an irresponsible and greedy financial system.

Finance, then, has a grubby reputation. At certain moments, as we’ve just heard, that reputation is fully deserved. But when the only perspective on finance is negative, we all miss out. Because, quite simply, there’s a lot more to finance than greed and irresponsible speculating.

In this post, we’ll discover some surprising wisdom from the world of finance. We’ll look at what a diversified stock portfolio can tell us about life experience. We’ll see what romantic partners can learn from corporate mergers and we’ll compare parenting to taking on debt. Read on for more strange and wonderful insights from the world of finance.

Finance isn’t just for investment bankers; it’s for all of us.

Consider this familiar scene, set inside the glass and steel of a Wall Street skyscraper. At the center of a stylish and sleek open-plan office, with necktie askew and feet on the desk, is the infamous day-trader. 

For many of us, it’s a picture of unlimited greed. We remember the 2008 crash. We see the leering figure of Gordon Gekko in the film Wall Street. 

But the truth is that many good, intelligent people spend their lives working in finance. Are they all engaged in a purely base, amoral business? Well, no, they’re not. Like any complex human endeavor, finance has a great deal to teach us, if we look at it the right way.

One major obstacle in coming to grips with finance is the traditional “Wall Street/Main Street” divide. On one side, Wall Street doesn’t help. The language of finance is often inscrutable. For instance, what’s the difference between “leverage” and “borrowing”? What exactly is “equity”? What do “options” mean? And further, Wall Street has behaved badly, from the excesses of the 1980s all the way to the 2008 crash. 

On the “Main Street” side, the widespread belief that the entire financial profession is greedy and amoral only strengthens the divide. This perspective in turn damages the way in which people working in finance see themselves. And it means that the valuable lessons contained within the realm of finance are lost to most people.

So how can we bridge this gap? We need to link finance to our broader human and intellectual endeavors. The book Confusion de Confusiones, by the seventeenth-century merchant Joseph de la Vega, provides an excellent example.

In this depiction of the markets of Amsterdam, Vega portrays a conversation among a philosopher, a merchant, and a shareholder. When the philosopher admits to knowing little about markets, the shareholder rebukes him. How could such a worldly man neglect this fascinating topic? He describes finance as “a quintessence of academic learning and a paragon for fraudulence . . . a treasury of usefulness and a source of disaster.” In other words, finance is complex, full of both the bad and the good.

Insurance is grounded in common endeavor, not just financial calculation

Let’s face it⁠—insurance has a bad reputation. We imagine boring, nerdy, even ghoulish executives profiting from the misery of others. But as with many things in finance, this is a reductive view. 

In fact, insurance originates on the swashbuckling high seas. As shipping goods across oceans carried such risk, insurance was invented to share this risk among many parties – including all the owners of the various goods on board the ship. 

This type of insurance emerged around 1000 BC on the Greek island of Rhodes, and is known as the Lex Rhodia. In essence, it states that if the captain of a ship had to throw some goods overboard to save the rest of the cargo, it was only fair that the owners of the saved goods compensate those of the lost goods. 

Three millenia later, it still applies to cargo ships, and today is called “the law of general average.” It ensures that everyone assumes the same risk when the boat sets sail. Effectively, it asserts that we’re all in this together. 

The American philosopher Charles Sanders Peirce even used this notion of insurance as an argument for virtuous living. He reasoned that, as insurance companies need to account for all kinds of unforeseen risks, they can only understand those risks through the experience of others. As our personal experience is limited, we can only prepare for the worst by understanding what countless others have faced. The bigger the sample, the better the prediction.

To understand the experience of others fully, we must empathize with them, too. Peirce declares: “To be logical, men should not be selfish.” So, contrary to the self-centered philosophies of economic thinkers like Ayn Rand or Friedrich Hayek, Peirce used this element of finance to advocate for a more compassionate world. 

The fundamental role of insurance is to help mitigate the disorder and chaos that we all face – from the sudden onslaught of pirates or crop-killing frost to a faulty stepladder – and to make sure that we are protected. The lesson here is that we all benefit when we face these things together, with empathy and understanding. 

Diversification is a good thing.

“Don’t put all your eggs in one basket!” How often have you heard that old chestnut? It’s not bad advice for investors: unless you’re Warren Buffet, betting everything on just one or two stocks can spell disaster in a world where firms go bust every day. 

Enter the principle of diversification – the art of spreading out risk across many stocks from diverse economic sectors and geopolitical areas. So if ExxonMobil’s share price takes a beating, no sweat: your stocks in Toyota, Heineken, and HSBC compensate. It doesn’t have to stop with the stock market, either. 

In life, as in finance, cultivating diverse experiences, friendships, and education can be enormously beneficial. 

Imagine yourself a student of anthropology. As a future anthropologist, you may need to understand the way early Phoenician traders valued their goods. With an economics class under your belt, you’d be much better equipped, wouldn’t you? In other words, rather than focusing all of your energy on your main subject, it could be more fruitful if you took classes in different subjects. After all, who knows what information might become essential after graduation? The principle of “diversification” can change your life for the better.

There’s a further lesson, too. Investors often diversify their portfolio with three different types of assets: high-beta, low-beta, and negative-beta. A high-beta asset is very risky, but has potentially enormous gains when the market is roaring. A low-beta asset is reliable, but not particularly lucrative. A negative-beta asset is one that, like gold, makes no money at all in good times, but is reliable when everything else is crashing.

If we extend this metaphor for a moment, we all have high, low, and negative-beta people in our lives. A “high-beta” might be someone we’re acquainted with for career purposes, who might open doors for us but won’t be the first person we turn to in a crisis. A “low-beta” is a good, steadfast friend. A “negative-beta”? They’re the people, like our family or closest friends, to whom we can turn for shelter in a storm.  

Just like the investor, we must balance our life’s “portfolio” with these people, and value them accordingly. When was the last time you phoned your “negative-beta”?!

In life, as with investment, luck plays an enormous role in our success or failure.

Remember the Parable of the Talents, from the New Testament? Before going on a journey, the master of a house entrusts three servants to look after his money. He leaves each of them a slightly different amount, according to their talents. 

Upon returning, he finds that the two most able servants have invested his money and made a profit. The third, to whom he entrusted the least, just saved the original sum. Rather than punishing the investors who risked his wealth, he rewards them. The man who risked nothing, however, is scorned for his lack of initiative. 

Many in the world of finance have interpreted this parable to mean that the market rewards the smartest, most entrepreneurial people, and punishes the meek. It’s a brutal, Darwinian way of seeing things. But does it stand up to scrutiny? The market suggests not. 

Most investors don’t profit off their talent alone. The truth is, those who invest in index funds, which rise and fall with the whole market, outperform so-called stock-picking “mavericks.” And the few who do beat the market? Well, a good deal of that is down to luck. 

If you ask 100 of your friends to stand in a large room and toss coins repeatedly, at least one person will flip “heads” over and over. Investing is the same. Truly successful investors have a great deal of luck on their side – yes, even Warren Buffet. For all his extraordinary success, he has occasionally made some bad investments. 

Investors who think themselves masters of their destiny would do well to accept just how lucky they’ve been. Otherwise, they’re in for a nasty surprise when that luck runs out and shares plummet. For the rest of us, market fluctuations can demonstrate just how central the role of chance is plays into the world around us. 

Finance teaches us to enjoy our successes when they come, but with humility and generosity, knowing that others may have succeeded had fortune favored them instead.

Seeing ourselves as “principals” and “agents” in our relationships can bring clarity.

When you head to the bank and ask an advisor to help you set up a new savings account, you enter into a relationship common to finance. You’ve become a “principal,” and the advisor, your “agent,” is there to carry out your instructions. 

This relationship is replicated throughout the world of finance. For instance, shareholders are principals who’ve tasked their agent, the CEO of a company, with returning good value for their investment. The CEO is a principal, too, who empowers her agents – the company’s employees – to work for the company. This principal/agent relationship helps clarify the motivations of those who work with money.

Understanding these agent/principal dynamics can shed considerable light on our personal relationships. Consider the way in which we parent our children. Are we truly acting as their “agent” when we nurture them? We might believe that by encouraging them to read certain books, take up certain musical instruments, or attend certain classes, we’re acting purely as their agents.

But isn’t it also true that parents raise their children to reflect the parents’ own values and tastes? In that case, then, the parents would be the principal in this relationship, tasking their children to satisfy their own demands. 

Let’s return to that company CEO, acting on behalf of her shareholders. On the surface, she appears to be a wonderful agent for those investors, returning excellent dividends year after year. 

But the truth might be that she is acting as the agent for her own interests. In raising dividends over the short term, she hopes to curry favor with the board of directors and secure a pay raise. These dividend increases might even be unsustainable for her company, whose entire financial future would be jeopardized. So, not a good agent for the shareholders after all.

In finance, it’s quite easy to clarify the agent/principle dynamic. Business relationships are more straightforward than the complex webs we weave in our personal lives. But, as with finance, if we can clearly define the kind of relationship we’re in, we’re able to be more honest about our motivations. And guess what? Honesty leads us to be better friends, partners, and parents.

Financial mergers can teach us a lot about romance.

January 11, 2001 marked the beginning of what was supposed to be “the romance of the century.” Whose romance, you ask? Two movie stars? A prince and princess? Competing athletes? Think again. 

The date marks the merger of two corporate giants of the age: the internet pioneer AOL and  entertainment behemoth Time Warner. Venture capitalists called it “the single most transformational event” in American business.

By 2009 it was all over: after years of acrimony, they formally separated. The merger had been an expensive failure, wiping out billions in market value. Just like an ill-suited marriage, they’d both chosen badly. 

So what lessons can we learn from a business merger that we might apply to our romantic lives?

First, due diligence is critical. In the case of Time Warner, it never vetted AOL’s financials thoroughly. This meant that they missed serious accounting fraud on AOL’s books, which hurt the merger down the line. In the case of a long-term romance, there is wisdom in vetting your potential partner, too. Do you both want the same things? Do you enjoy living together? Are children on the agenda? If you fail in your due diligence on these critical issues, heartbreak is inevitable.

Second, filling a hole in your life is not a good “merger strategy.” In the case of the AOL-Time Warner merger, the CEO of Time Warner felt he was “behind the times” when it came to technology, so he sought a merger with a digital media company. Unfortunately, this quick-fix was wrong for both companies, and failed to account for fundamental incompatibilities. Apply this to our romantic lives: choosing a partner because that person seems to make up for a lack in ourselves is deeply unwise. Just because someone has something you don’t – say, money or confidence – isn’t a good reason to date that person!

Finally, unequal mergers are easy, but of limited value. Time Warner quickly became dominant in the merger with AOL and imposed its business practices on the younger company. Mergers like this – which are, in essence, takeovers – appear easy, but they tend to fall apart as resentments linger. “Unequal mergers” between two people are rarely a good idea, either. Any partnership is on firmer ground when it’s between two people who respect each other as equals.

Sometimes taking on debt is necessary.

Suppose you want to start a new company that specializes in selling oat milk. You’ve identified a key market for the product, designed a cool logo, and purchased a domain name. Now what? Certainly, you’ll need money – to purchase stock from wholesalers, hire your staff, and pay distribution costs. Most likely, you’ll need to borrow capital from a bank or private lender.

In other words, to get off the ground, you’ll first need to go into debt. Just like businesses, we sometimes need to take on debt to achieve our dreams. This debt can be economic, or more abstract. 

Take education as an example. To gain a qualification that helps our financial prospects later in life, we often get into debt. We pay tuition fees in the hope that this investment will pay off in the wonderful job we’ll get later.

The same is true when we consider having children. Raising a child is an expensive business. But here the debt isn’t just financial, it's emotional. When we have children, they draw heavily on our emotional resources, demanding unconditional love and endless attention. But many parents argue that all of these “debts” are paid off with unimaginable riches. As we watch children grow up and discover the world around them, we rediscover it ourselves.

In short, debt can pay off handsomely in the long term. Let’s consider the example of contemporary artist Jeff Koons. After working as a Wall Street trader, Koons understood finance quite well. He therefore understood that without debt, he couldn’t function as a successful artist. His enormous sculptures are possible only with a great deal of initial financing. His shiny balloon dog or Michael Jackson pieces, for instance, required lots of costly materials and expertise to craft. 

So, to ensure that he can produce a new work, he sells it first – before he’s made it. In effect, two parties enter into a debt relationship: Koons is indebted to the buyer, for whom he now makes the work. The buyer takes on a debt that might never be repaid if Koons fails to make the piece. Without debt, however, there is no shiny new sculpture at all.

Like finance, life demands moral complexity.

Imagine yourself the owner of a delivery business that has hit a rough patch. You’re confronted with a choice: for the business to survive, you can either lay off your talented new apprentice, or require everyone to take a big pay cut. Which do you choose?

Life is full of difficult, complicated decisions like this. And, sadly for us, we can’t avoid them.

Here’s an example from the world of finance. To the public, former CEO of American Airlines Gerard Arpey is something of a moral giant. In the 2000s, when other airlines declared bankruptcy so they could “renegotiate” expensive pensions and labor contracts, he held firm, saying, “Call me old-fashioned. But I think companies ought to pay people back.”

Meanwhile, American Airlines struggled with these expensive commitments. But rather than give in to pressure from the board of directors, who wanted the company to declare bankruptcy, Arpey resigned. After stepping down he was celebrated for his integrity – including in a New York Times op-ed entitled, “A CEO’s Moral Stand.”

So a good man decided to stand by his principles, rather than compromise like every other Machievellian capitalist. Simple, right? Well, not exactly.

Before Arpey resigned, his uncompromising position meant the company was running into serious financial trouble. Aircraft manufacturers doubted its future, partner airlines began questioning shared agreements—there was even a mutiny amongst its pilots. The airline’s future looked bleak—along with the jobs of all his staff.

Soon after Arpey resigned, American Airlines declared bankruptcy, and the new CEO, Thomas Horton, renegotiated those pensions and labor contracts. In doing so, he saved the company. Quite soon, its long-term finances were in order. Today, it’s the world largest airline, employing more people than it did under Arpey’s leadership.

So who’s the hero? The moral martyr, Gerard Arpey? Or Thomas Horton, who took the brunt of the unions’ anger, but ultimately saved the company? In retrospect, many would argue for Horton.

Life is full of similarly complex situations. The lesson from American Airlines is that it's honorable to confront the messy, complicated parts of life and deal with its conflicting priorities. Learning to navigate competing obligations, while understanding the consequences, is often the best we can do. Another foundational lesson for life from the complex, and all-too-human, world of finance.

Although finance is often associated with avarice and irresponsibility, like any other ancient and sophisticated human endeavour, it contains valuable lessons. From insurance to portfolio-building, there are many things that finance can teach us about life in general—whether that’s the necessity of taking on “debt” if you seek to achieve, or the romantic wisdom contained in corporate mergers. Significantly, finance also teaches us that complex moral decisions are part of life, and that the sooner we are able to face them, the more we grow as human beings.

Action Plan: Accept that accumulation nevers brings fulfillment

When gazing enviously on the lives of the ultra-rich, remember this simple logic: the more we attain, the more we want. It’s never enough. Nobody ever becomes a millionaire and then is wholly satisfied. So, learn to be happy with what you have in this present moment. Unless you’re in seriously dire straits, it’s probably just enough.