"A fascinating new perspective on modern finance," --Oliver Hart, 2016 Nobel Laureate in Economics
"Lucid, witty and delightfully erudite...From the French revolution to film noir, from the history of probability to Jane Austen and The Simpsons, this is an astonishing intellectual feast." --Sebastian Mallaby, author of The Man Who Knew: The Life and Times of Alan Greenspan
In 1688, essayist Josef de la Vega described finance as both “the fairest and most deceitful business . . . the noblest and the most infamous in the world, the finest and most vulgar on earth.”
The characterization of finance as deceitful, infamous, and vulgar still rings true today – particularly in the wake of the 2008 financial crisis. But, what happened to the fairest, noblest, and finest profession that de la Vega saw?
De la Vega hit on an essential truth that has been forgotten: finance can be just as principled, life-affirming, and worthy as it can be fraught with questionable practices. Today, finance is shrouded in mystery for outsiders, while many insiders are uneasy with the disrepute of their profession. How can finance become more accessible and also recover its nobility?
Harvard Business School professor Mihir Desai, in his “last lecture” to the graduating Harvard MBA class of 2015, took up the cause of restoring humanity to finance. With incisive wit and irony, his lecture drew upon a rich knowledge of literature, film, history, and philosophy to explain the inner workings of finance in a manner that has never been seen before.
This book captures Desai’s lucid exploration of the ideas of finance as seen through the unusual prism of the humanities. Through this novel, creative approach, Desai shows that outsiders can access the underlying ideas easily and insiders can reacquaint themselves with the core humanity of their profession.
The mix of finance and the humanities creates unusual pairings: Jane Austen and Anthony Trollope are guides to risk management; Jeff Koons becomes an advocate of leverage; and Mel Brooks’s The Producers teaches us about fiduciary responsibility. In Desai’s vision, the principles of finance also provide answers to critical questions in our lives. Among many surprising parallels, bankruptcy teaches us how to react to failure, the lessons of mergers apply to marriages, and the Capital Asset Pricing Model demonstrates the true value of relationships.
THE WISDOM OF FINANCE is a wholly unique book, offering a refreshing new perspective on one of the world’s most complex and misunderstood professions.
Full disclosure: I'm a former student of Mihir Desai. I had a lot of expectations from this book knowing Mihir as a teacher, and knowing his ability to break down complex ideas into their simple, intuitive, core understandable by a lay person. This book exceeded those high expectations by showing me a different side of Mihir - his understanding not only of Finance, but also of life in general. Not only does he explain ideas in Finance with elegance, but he relates them to ideas in life (relationships, love, marriage, career choices) in a very deep manner. I found myself reflecting on my own life most of the book, but once I was done reading, I also walked away with a much better appreciation of the concepts in Finance. This is coming from a practitioner of risk management who has read multiple books on the finance topics covered in the "Wisdom of Finance". The book was also a breath of fresh air for me by giving a new meaning to my profession, which has come to be derided in the society and in its depictions in the mass media.
Highly recommended for the financial geek well versed with ideas in finance, for the lay person trying to develop an intuition for finance, and everybody in between!
Quite possibly one of the most interesting books I've read in years. The author takes stories far and wide - from Jane Austin, to Stringer Bell from The Wire, to The Simpsons, Shakespeare, The Producers, and so many more - to craft a story of the basics of finance from the perspective of the humanities. There is amazing insight at every turn as he draws from literature, history, art, film, and theater to illustrate basic concepts of finance and their importance in life. I can't recommend this enough!
The Wisdom of Finance is worth reading if only to marvel at Mihir Desai’s amazing mind, wide range, and exciting set of insights. The book undersells itself, claiming to use a range of novels, movies, music, TV shows, philosophy and history to better understand and illuminate finance. And it certainly does that, covering the full set of topics: insurance, asset pricing, corporate finance, principal-agent problems and bankruptcy among other topics. But the book is about much more, including better understanding literature and our own lives.
To give one example that illustrates the astonishing range of Desai’s understanding, consider his illustration of leverage by comparing George Orwell (who went into semi-seclusion for years to write 1984) to Jeff Koons (who at his peak employed 150 people to produce his ideas). He uses this not just to understand the role of leverage in the financial system but also to introspect about his own life where he is on the Orwell-Koons spectrum, and how that relates to happiness.
And did I mention the astonishing range? We have gotten used to Jane Austen and Leo Tolstoy showing up in economics books. But everything from ancient Greek tragedy to Kanye West? All effortless incorporated in many cases with interesting juxtapositions, like the Orwell-Koons example.
If this enjoyable and thought provoking book does not convince you of the wisdom of finance it will at least convince you of the wisdom of Mihir Desai.
This was such a beautiful and relevant book that I did not think I needed to read. Finance gets a bad wrap, but the issues finance deals with are human issues. Desai shows this through literary criticism and explanations of core financial issues. Risk, for example, is about the bad stuff that can happen to you in life. Finance can show us how to deal with this risk. I teach contracts and I'm always trying to convince my students that contracts are about trust and relationships.
I wish he had done more here in teaching the finance types about ethics and bringing in those human values (value for non monetizable things) into their lives and models. A great and satisfying read overall.
A wonderful book that looks at finance from a very refreshing lens!
The author does a tremendous job of connecting the myriad concepts of finance, it's origins with our lives through very relatable experiences and stories of people in the preceding millennia and right upto today.
For example - 1. Insurance came about because there is inherent randomness and unpredictability in life and while it is difficult to make a sound guess about it in isolation for a single instance / individual it becomes much easier to make a good guess about it in aggregate.
2. As firms use leverage to expand and grow beyond their existing means (i.e. the cash at hand), similarly human beings can also accomplish great things and have a rewarding life as they make commitments i.e. lever up; the thing to note is that as with firms one should lever up to the point one can handle.
3. As with firms, so even in an individual's life the people we have in our life are assets. Some are negative beta assets whose love for us is unconditional - Parents, close family; low-beta assets - close friends who remain with us through the thick and thin; high-beta assets - who are with us in our good times and kind of leave us when the going gets tough. We need to value these categories in that order.
4. Through quite a few examples the book explains any sort of risk taking has a probability of failure, but failure as long as it is forward looking will let one succeed eventually - whether it be at an individual level or at an organisation level. One gets to know how bankruptcy rules came about to let people fail with grace and more importantly to prevent destruction of value
A highly recommended book, for anyone remotely interested in finance - which we all should be as it is inseparable from our lives! It not only would help one understand finance but also help understand it's applicability in our day to day lives for both money and non-money matters.
‘Wisdom of Finance’ was a book that really punched me with fresh ideas; it’s been a while since I experienced this level of 'new ideas flow' from reading. It doesn’t have anything to do with me working in finance (maybe a little, like 5%). Even though it contains multitude of cases happened in the finance world, the book itself is not about finance – it’s about values, relationships, commitments, and many more. Mihir Desai takes basic ideas about risk and return, capital asset pricing model etc and turns them into remarkably deep and authentic lessons we can apply to thinking about the world and our lives. It provides an excellent framework to think about how we should approach life’s important aspects with ideas borrowed from the ‘not-so-much-loved’ finance universe (reference to the chapter ‘Why Everyone Hates Finance’). I loved how he connected literature, arts, and finance to deliver his ideas in a form of outstanding and highly readable work. So glad to discover this book from Mihir Desai's podcast with his colleagues.
- The act of creating ourselves is a miracle – and, fortunately, we have more than seven days to become principals rather than agents
- "Must is who we are, what we believe, and what we do when we are alone with our truest, most authentic self. In our instincts, our cravings and longings, the things and places and ideas we burn for, the intuition that swells up from somewhere deep inside of us. Must is what happens when we stop conforming to other people’s ideals and start connecting to our own."
-"To be a good human being is to have a kind of openness to the world, an ability to trust uncertain things beyond your own control that can lead you to be shattered in very extreme circumstances, in circumstances for which you are not yourself to blame"
-But underneath all of finance is this underlying idea: the pursuit of more will yield less and less. And any expectation other than that is not consistent with the ideas of finance
What an incredibly smart journey about finance. It felt like I was engrossed in his Harvard Business School class and left wiser from it. His ability to use literary classics to explain finance is so impressive. This might be one of the wisest and interesting books I’ve ever read.
When I read Piketty’s “Capital in the Twenty-First Century” I found that I really appreciated his efforts to explain wealth and capital in historical context by referring to the fiction of the times, especially Jane Austen’s. By using the descriptions of the characters and their place in the world from those fictional stories written centuries back, you understood how wealth made itself known, how money was spent, and how wealth brought status and the ability to purchase fine tools (e.g. a horse drawn barouche-landau was the Tesla of Austen's day). The fiction reflected the times.
In “The Wisdom of Finance”, author Mihir Desai takes the idea of illustrating financial situations with fiction through a variety of financial concepts, from risks and insurance to investments and return, and to debt and bankruptcy. He touches on the poetry of insurance executive Wallace Stevens, the tradeoffs in “The Remains of the Day”, and Dashiell Hammett’s story of how a fellow reacted to a near-death experience in “The Maltese Falcon”. Only a few of the examples were specifically about finance. Most were about situations in life that related to the concept being discussed. Desai also moves beyond fiction, exploring these financial concepts through poetry, song lyrics, recent news articles, and TV show episodes.
I liked the idea behind this book – using the liberal arts to illustrate stony financial concepts that many financial students probably learned without relating to the real world, or at least to events that could have happened in the real world since we are talking about fiction. The book is based on a “last lecture” given to Harvard business students, so it may have been one of the few chances for them to look to the liberal arts for storytelling prowess on these kinds of financial relationships/events. The book was written well. I did find the mindset of the author, basing the covered concepts on a foundation of risk, was entirely appropriate, but if you don’t think in that way all the time it might cause the reader to wonder about the path taken. I know I wondered and had different (lower) expectations, and I believe it was because I was thinking more as an accountant than a financial manager. Overall, the book was well done and enjoyable to me, more enjoyable than I initially expected. If the idea of using stories to illustrate financial concepts grabs you, you may well enjoy it.
As the title implies, this book attempts to bring together the worlds of finance and humanities. It uses literary and other assorted media references to illustrate particular financial concepts, and argues that finance can be used for the good of humanity, despite the finance's reputation as greedy and evil.
Although I earned my degree in a social science, I find myself working in a finance-related field. I feel pretty ambivalent about my current career, and I hoped that this book might open my eyes to a perspective I hadn't considered. And it did provide me with some new concepts and perspectives, but ultimately, I feel as ambivalent about this book as I do my job. It just didn't convince me the way I had hoped to be convinced.
It's an unusual book that connect finance with real life stories, full of wisdom and real stories of past man and woman, not always connected to finance. This is the kind of book that talks about a subject using another and allows your brain to make connections and think multi dimensional. If I could I would give more than 5 stars.
Given the odd premise (bouncing concepts of finance off of poetry, literature, and pop culture), I went into this book with rather low expectations. Needless to say, they were surpassed in every way. As someone who has struggled for some time to pierce the veil of complexity surrounding the financial world, this book has helped immeasurably in helping me to understand it, and in an oft entertaining way.
I don't know how appealing this book would be to someone who actually works in or with Wall Street. But, for me, it was amazing and I'd absolutely recommend it to anyone.
The Wisdom of Finance it seems is a primer on the moral hazards undergraduate and more so graduate business students can expect to find once they leave the academy and join Wall Street.
Author Mihir A. Desai employs literature to explain how the principles of business and high finance inform universal human challenges not only in business, but in life.
As a graduate of English Lit and later an MBA, I was a sucker for this kind of book. Indeed, I enjoyed it, if I didn’t think all of the chapters were equally strong, or the morals all that intimidating.
It is substantively a book of moral philosophy.
I ran into my own moral philosopher in business school, the noted Canadian accounting professor Al Rosen, the sort of guy you either loved, or loved to hate. The guy who failed an entire accounting class, but then had to walk it back after the students complained.
What Prof. Rosen taught me — and our relationship wasn’t the easiest — was that numbers masked lies as often as they told the truth, perhaps moreso. And the reason he taught this to his accounting students was that the evolution of accounting was the evolution of storytelling.
If you look at a balance sheet or a profit and loss statement, you were purportedly looking at the viability of a business in a moment of time and that the conventions of accounting storytelling, like “accounts receivable” and “accounts payable” not to mention “fixed assets” were to tell you the value in real time of a business even though none of those values could possibly be right.
The numbers were usually created to pacify the reader, to keep the reader from looking behind the numbers at the underlying value of the business, and the lying liers who wanted you to accept them as truth...usually management. Rosen’s point wasn’t that the numbers were always meant to to disguise malfeasance, just that the nature of the process of storytelling required simplification and gross generalization.
Desai gets at some of this in his chapter about the problem of agency, whether managers are really working for shareholders, or customers, or their employees, or just themselves. This is not necessarily a problem of finance. It is as much a problem of commerce and social psychology.
Economic behaviouralists like Daniel Kahneman, psychologist Dan Ariely, Richard Thaler and Cass Sunstein get into how the mind actually works when people are given moral choices disguised as financial options.
Another book I read recently, “Scarcity: Why Having Too Little Means So Much,” by Sandhills Mullainathan and Eldar Shafir, shows how perceived scarcity can ruin or enhance our decision making, depending on the circumstances.
But today I am dealing with the moral quandary of what to do in a pandemic that will accord with my personal ethics, and the dictates of business. How much loyalty as a businessman I owe to my employees vs my family and their sacrifices on the road to building a viable business.
if I close up my shops and lay people off am I protecting my employees or letting them down and dumping their personal needs on to society. The customers seem to need our goods and services, and the gov’t has classified my business as essential to the economy...so we stay open to the extent that my employees will come in to work.
In other crisis I have simply met the challenges head on and worked harder. In this crisis I have to change directions fast and, because I am at a high risk of infection, have to stay out of my stores for mine and my family’s safety.
There are my obligations to landlords, to suppliers, to the financial institutions, the utilities, and to govt.
These are not easy questions either. And literature, while a nice diversion, doesn’t really help me all that much.
Professor Mihir highlights how human finance is, and how it's all connected to our basic instincts of risk. How we can find examples of financial concepts in broad range of literature and stories, and how naturally the current financial system evolved to be, stemming from our basic needs. I would recommend anyone working or thinking of working in finance to read this book. Was fun to listen one of my favorite hosts of After hours for 6 hours and 30 minutes in his audiobook.
این کتاب یکی از متفاوت ترین کتای های موجود در زمینه مالی است. تمرکز کتاب بر کشف روابط بین مالی و مسائل روزمره ی زندگی انسان ها است. کتاب تلاش می کند تا مرز های در هم تنیده مالی و امور زندگی و اخلاقی را برای ما روشن تر کند. نویسنده تلاش می کند مفاهیم مالی را در رمان ها، اشعار و قصه های روزمره پیدا کند. کتاب را به همه ی کسانی که به دنیای مالی علاقه دارند توصیه می کنم. ��تاب از 8 فصل تشکیل شده است که در هر فصل نقش یکی از اصول مهم مالی در زندگی و رد پای آن در فرهنگ و هنر بررسی می شود. به گفته ی نویسنده، این کتاب به متخصصان مالی ای که هر روز سر در اعداد و ارقام و فرمول ها دارند حکمت مالی و راه رستگاری در حرفه را آموزش خواهد داد، چه کنیم تا کارمان باعث خلق ارزش شود نه نابود کردن آن. در عین حال کسانی که هیچ ایده ای از مالی و کاربرد های آن ندارند بدون طرح هیچگونه تعریف فنی یا فرمول و نمودار، کاربرد های مالی و نقش مثبت آن ها در زندگی را درک خواهند کرد.
The one who are looking for "how finance works or academic information about the subject" will find "TOO FEW" in this short book. The author extremely focused on "intersection of finance and everyday life(love, romance,movies, music, insatiability, philosophy)" .. and I think that is boring for FİNANCE...
Just to get it out of the way, the reason I picked up this book was to not learn the technical details of finance. This book delivers on what it sets out to do i.e. explain financial concepts that seem out of this world to an untrained person. It does the opposite as well, if you're familiar with financial concepts already, prof Desai will open your eyes to the real life implications. My favourite chapter was on the principal-agent problem narrowly followed by how principles of mergers and acquisitions and romantic relationships are basically same.
The book is peppered with some great stories and case studies which humanises the financial concepts to a great degree. The fact that you can find reference to Jane Austen and Leo Tolstoy in one page and a few pages later you're reading about Greek tragedy and Kanye West, shows how great the range of the author is capable of.
This is once again one of those books that I wished I had access to when I was younger. It is genuinely a must read if we find ourselves at the crossroads of risk and rewards, as we all do on a daily basis.
Thanks professor Desai for such a balanced and thought provoking book. Erudite and entertaining at the same time.
I met this professor from his “Leading with Finance” class at HBS. Excellent resource to understand finances. No figures or numbers found in his book. He takes you from personal stories and takes you to a deep understanding of finance terms and concepts. Either you are new on the econ or finance room, you’ll get something new out of it.
Arts, history, films, literature, etc. makes part of the stories of this book. I got a way deeper understanding of the insurance business and his importance in the economy. It brought me fresh ideas to digest and ponder upon. If you want to understand more about economics, finance and this chaotic world in which we live, this book will help you a lot.
My personal rating is 9/10. I mean, just go read it. My favourite chapters are 'On Value'+ 'Becoming a producer' + 'No Romance Without Finance'. I think what sets the book apart is the intersection of economics, politics and history to explain the evolution of finance and it's main concepts. Desai does a great job to help outsiders (external to the finance industry) understand concepts like portfolio theory, hedge funds etc. Book can be finished within a few-days (4-5) maximum.
Mihir Desai is well read in the technical and number-based side of finance as well as the philosophical and practical. He illustrates the relevance of finance as not only a field for making money but as a way of improving individuals lives and bettering humanity. The book is full of stories and references to many iconic literary works that it's easy to forget this book is from a finance professor. Overall the book is an excellent teacher of not only finance principles but life principles. The author makes finance approachable to anyone, not just finance students. Would highly recommend.
La brecha entre el mundo financiero y las humanidades no siempre ha existido. Desai nos enseña a pensar en las finanzas como una disciplina que podemos encontrar en los rincones más humanos de nuestras vidas, ayudándonos a entender con diferentes historias y fábulas los conceptos centrales del mundo financiero.
Clever, fun nonfiction read on the parallels between finance and the humanities. Expected a little more humanities than finance based on the author's note at the beginning of the book and don't know if one who doesn't have some background in finance would enjoy it as much as I did. But, it was more fun than my finance/economics classes in college and an enjoyable read. Loved the chapter on marriage/mergers as well as likening stock options to Jane Austen's Pride and Prejudice.
Desai knew he needed a catchy title and thus The Wisdom of Finance but his real thesis is discovering humanity in finance and thus the rest of the title. If I were forced to put wisdom on a numerical scale with finance as 1, then humanity might be a 100, and the ignorance of humanity might be 10,000. So Desai faced an uphill climb with this reader. But he manages.
Precisely because he looked for the humanity and only then its pale reflection in finance and not the other way around. Replete with examples from history and literature, not to mention everyday life, there little are nuggets for everyone.
At the end he wonders why the world has such a low opinion of finance, but fails to find a compelling answer. I suggest it is the know-it-all elitism that extends to economics as a whole. And never have so many had so little to be proud of. To the practitioners of the hard sciences economics and its snotty little offspring, finance, are more mythology than science. This is a great tragedy. A comprehensive scientific understanding of economics is of far greater importance to humanity than, say, particle physics.
Yes, I despair of economics. After all, it's hard to fix what's broke if you have no real understanding of the machine.
The author echoes my feelings that, rather than being at odds (or even at war), the humanities and sciences - finance in particular - are in fact complimentary and intertwined in ways that few today appreciate. Leveraging wide-ranging examples, from Jane Austen to the Producers and George Orwell, the author frames finance in everyday human terms, defending the usefulness and practicality of risk management in particular, something near and dear to my heart. The author is clearly well-read and has thought deeply about the subject, which is reflected in the quality of the writing. At a time when bashing the financial industry is all the rage, it was refreshing to read such a lucid defense of the field.
As a noobie to finance, I wanted an accessible finance text to introduce me to what the heck is finance. Fortunately, this book has exceeded my expectations. Even though previous background in finance would have helped, Desai describes finance with such a humanity that even a noob like me was able to understand and apply finance strategies to my daily life from spending proportional amount of time on "High-beta assets" such as acquaintances to "negative-beta assets" such as my family. Moreover, the book's humanity approach to finance helps to give many personable reasons to why strategies such as "Leverage" is useful or painful.
Highly recommend to... pretty much anyone. Even those who believe that finance is too math heavy", Desai uses so many historical and literature examples to illustrate finance applications that I forgot that the finance course in my University has a Calculus pre requisite.
Some chapters are difficult to read, in part due to the constant references to books, films… I feel like I didn’t properly squeeze the information of about 30% of the book. Overall an interesting hindsight into basic finance issues, comparing them to everydaylife situations and literature.
An obvious choice for my 5 star rating, I found The Wisdom of Finance, Discovering Humanity in the World of Risk and Return (2017) by Mihir A. Desai to be a thoughtful, informative, fun, easily digestible, and memorable read. Certainly this book would be great to own though my edition was from the library. You will like this book if you have a checking account or a loan or have ever made a commitment to yourself or others - pretty much everyone.
Desai uses broadly researched literature - from ancient to contemporary - that includes poetry, plays, films, TV series, books, Biblical parables, the ancient Greeks, and Broadway plays to "cross into the terrain between finance and the humanities" in order to plumb the human story for "wisdom of our conduct." Given that writing this book was not an attempt to achieve an overarching coalescence of grand "a-ha" connections, Desai's book achieves finely taught vignettes mirroring our human and cultural relationships regarding the nature of risk, obligation, trade-offs, reward, investment, leverage, debt, value, and principles.
Here are several quotes for reference.
"...living up to and settling one's obligations is the road to salvation."
"...leverage in life produces benefit. We gain from commitment. Leverage is not a zero-sum game."
"...the world view of many practices of finance can usefully be tempered with humility, generosity toward others, and a keen appreciation for the force of luck in life."
"By most measures, firms are dramatically under leveraged. They don't appear to take the full advantage that the trade-off theory implies...Many individuals may well do the same thing - they retreat from commitments and obligations, and in the process, they limit what they can do...Studies of regret show that regret mostly arises from commitment avoidance, untaken educational opportunities, missed love connections, and inattention to [their] children."
"Fortunately...we can renegotiate our commitment - to loved ones, to jobs, to society - when we need to as that we can invest anew...Sometimes fear is the only think that is stopping us from trying to do so."
The Wisdom of Finance by Mihir Desai delves into core financial concepts i.e. insurance, options, leverage, valuation, diversification, capital asset pricing model, bankruptcy etc. connecting with various analogies of our social life. The book introduces core financial concepts taking different perspective from our general personal life than decisions as a finance professional.
Appropriate Financial structure is extremely important for the growth of the economy. Lack of inappropriate financial structure can result in distrust, and stifle the growth of the economy. Lack of appropriate financial infrastructure can result in financial manipulation, the sector extracting more value than the value that the sector is creating. The understanding of financial concepts and its correlation/analogy with daily life scenarios will definitely enrich our understanding and decision making.
Insurance Life is simply not very ordered. The uncertainty and randomness play a huge role, and its fundamental inseparable part of life. Randomness is everywhere, but predictable in aggregate is the foundation of insurance.
Risks and uncertainty are undeniable, and it shouldn’t be ignored it should be managed through insurance. The more experience an insurance company has with a population, the better their understanding of probabilities, creating pooling mechanism and the more successful is the business. For insurance companies, experience is a critical method for success.
Similarly, we should experience as much as possible in order to make good decisions and understand the world with the right probabilities. Our own experience will be always limited, therefore understanding from the experience of others through books, lectures will enrich in taking better decisions. Experience is the key method to deal with the chaos of the world as in the case of insurance.
Options In the world of finance, options represent freedom and opportunity. Options allow buying a share at a predetermined price at some point in the future for a relatively small price today. By perusing education and skill in our life, we tend to increase the option value as more degrees means more options & opportunities in the world to live a meaningful life.
Leverage Leverage amplifies life in both positive and negative direction. Leverage can increase returns substantially. If a house is purchased with loan/leverage (for example 20% of the house value i.e. $ 100 down payment, and $400 as mortgage) and the house price rise in value by 10%, the wealth will increase by 50% as house is worth $550 whereas the outstanding loan is $400.
But if the situation reverses i.e. the house price declines instead of increasing, leverage can also worsen the situation. The excessive leverage/borrowing can result in bankruptcy during bad times, but under favorable business situation, the results are very rosy.
Similarly leveraging skill, understanding, opportunity, relationship is crucial to pursue and archive meaningful objectives in life. If appropriately leveraged, the results can be significant, but if leveraged without much understanding & effort, it can result into unfavorable situations.
"If you buy things you do not need, soon you will have to sell things you need" Warren Buffet
Valuation & Value Creation Valuation and value creation is extremely important aspect of finance and investing. Investment is a very forward-looking field. It always looks forward in terms of value creation by the company or a project in the future, and the measurement of valuation is both qualitative & quantitative.
Similarly, in our life, if we take decisions with the perspective of valuation and value creation, it will significantly improve our allocation of time, energy, resources to fulfill our objective and live a meaningful life.
“Price is what you pay. Value is what you get.” Warren Buffet
Diversification Diversification is extremely important to increase the probability of being successful in the field of financial investment, similarly, the diversification of experience and relationship is important to be successful in the field of investing. Relationship do not crowd each other, but they enrich each other. In order to enhance the portfolio of our lives, the contradictory relationship also creates value by exposing to different views/approaches to life & problem-solving.
Principal-Agent Problem The largest individual investor of Apple is Tim Cook who owns 0.02 % of the company. The largest institutional investor of Apple owns less than 10% of the company. There are millions of investors in Apple, they have delegated the job of managing the company to professionals, and the investors expect that the managers will take decisions in the best interest of the company and shareholders. Managers do not always do the things that they are supposed to do, and shareholders at times struggle to control these managers as it is difficult to understand everything about the company due to the asymmetry of information between managers and owners. It is one of the fundamental problem of modern capitalism. The conflict of Principal-Agent Problem is central to Corporate Governance. Shareholders/investors are principal, and managers are agents of the corporation.
This frame of corporate governance i.e. Principal-Agent problem has analogy with even day today decisions as consciously or unconsciously we are taking decisions on behalf of others. Many a time, we have to delegate the task in our life to others in our professional as well as personal life, in that case effective delegation, supervision and empowerment of the task and objectives is crucial. While delegating the task, we as principal want the agent i.e. subordinates to do the task. In our life the role of principals and agents keep on changing depending upon the scenario. The ability to effectively delegate is crucial.
Bankruptcy In the past, borrowers who could not service their debts were treated as moral failures and harsh penalties were associated with it. Imprisonments were very common with debtors. The lack of bankruptcy structure i.e. appropriately dealing with business failure curtailed the risk appetitive of the society. When it was realized that failure is as critical aspects of life as success, and it also plays an important role in the society, bankruptcy structure to appropriately deal business failures were introduced. It resulted into more risk-taking & innovation in society. Appropriate bankruptcy structure is critical to create environment in which business & innovation can flourish in the society.
Similarly, in life it’s important to understand the critical role of failure. The societal stigma associated with failure needs to be rewired, and treating failure as an undeniable aspect of life is crucial.
The understanding of financial concepts and its correlation/analogy with daily life scenarios will definitely enrich our understanding and decision making to live a meaningful life creating tons of value in the society.