A defence of finance drawing on the arts

It's not often – if ever – you'll come across a book written by a Harvard finance professor who seems just as comfortable talking about the romantic choices of Pride and Prejudice's Elizabeth Bennet or the business acumen of Stringer Bell in The Wire, as about economic theory.

But, in his new book The Wisdom of Finance, Mihir Desai, a professor at Harvard Business and Harvard Law School, has drawn on the arts to make his case. It could just as easily be called "in defence of finance", with Desai attempting to calibrate the poor public perception of people working in his profession – and to offer a solution as to how this demonisation can end.

He had two motivations in writing the book.

“One, there is a great deal of misconceptions about finance and then finance gets demonised, and a lot of this happens because people don’t understand finance. And my second motivation is that people in finance . . . we have to rehabilitate finance, and look at what we do with a moral lens.”

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For Desai, literature can offer this ethical insight.

“The humanities lets you look at things with a moral lens,” he says.

While Desi is not blind to the events that precipitated the most recent financial crisis – both in the US and Ireland – and he accepts that the stereotype of finance having some nefarious intent is "not undeserved", he says it's time we also realise the importance – and even the nobility of it.

"Finance is really central to our lives; historically we've understood the difficulties and also the nobility of it," he says, drawing on a quote from the 17th century which asserts that finance "is at once the fairest and most deceitful in Europe, the noblest and the most infamous in the world, the finest and the most vulgar on earth".

“We’ve lost the nobility,” he bemoans.

He accepts that finance has also used complexity to obfuscate and “intimidate other people”. But the “core idea is not rocket science, it’s quite intuitive”.

He also has some ideas on how we can expect better behaviour from financiers. And it’s not through regulation.

In the aftermath of the financial crisis, countries around the world – Ireland included – looked to shore up their regulatory regimes to prevent such bad behaviour taking place again.

For Desai however, regulation won’t fix the problems, as “people will game it”.

“The regulation we had was clearly insufficient, that’s clear, but we can’t expect that much of regulation ultimately,” he says, adding that his ambitions for regulation are actually quite low.

Instead, he says it’s about elevating financiers’ aspirations, “so that they will aspire to behave better”.

“It’s really difficult for the people being demonised as it leads to worse behaviour. We expect very little – and so they behave fairly poorly,” he says.

And the route to instilling more of an ethical compass is by putting it through a prism of art and literature.

"Finance is becoming divorced from the humanities, it's really problematic . . . we need to bridge finance and the humanities,"he says, adding that the best way to get back to that, "is to understand risk management not through calculus and graphs, but through Jane Austen and Anthony Trollope.

An example used in the book that will be familiar to many is the romantic choices faced by Elizabeth Bennet in Pride and Prejudice. Her challenge in finding a husband, Desai writes, is like the tradeoffs faced in many other settings. Consider the risks Elizabeth faces when she turns down Mr Collins' proposal; in doing so she risks being left with nothing. As her sister warns, when it comes to the marriage market, "one false step involves her in endless ruin".

But this “trade-off” – which ultimately works for Elizabeth when she marries Mr Darcy – can be applied in a myriad of ways Desai writes. “Is continuing with further education ‘worth it’? Will the returns on that education compensate for the risks of specialisation and indebtedness? Is investing your human capital in that startup company worth the risk that it will go belly-up in the next 12 months? Should you keep looking for the perfect job or accept the offer on the table?”

While Desai concedes that a humanities-based approach to finance may be “idealistic”, he doesn’t see an alternative.

“I don’t think regulation is terribly constructive, we really have to expect more of these people.”

As a Harvard professor, Desai is also keenly aware of tax policies in the US – and how they might impact on Ireland.

On US president Trump’s proposed tax reforms, which could see the US corporate tax rate plummet from 35 per cent to as low as 15 per cent, Desai doesn’t expect much progress in the short term.

“The proposal is effectively one piece of paper, it doesn’t have details, and it doesn’t have any political realism for it,” he says, adding, “I’m deeply sceptical that it happens.”

However, he concedes that US corporate tax rates are nonetheless on a downward trajectory, noting that the major consequence of this will be that capital and cash immobilised offshore will be freed up. But noting how Ireland has developed “real capabilities, it’s an attractive place to be”, he doesn’t think the impact will be as bad as we fear.

“I actually think Ireland won’t get hurt by that; it’s strengths transcend the tax benefits,” he says.

On the Apple tax fine, Desai says “it’s a manifestation of how screwed up the US tax system is” adding that “it’s making firms do really crazy things”.

Noting the "great irony" in the European Commission demanding that Apple pay Ireland €13 billion, and the Irish Government says it doesn't want it, Desai won't however, draw a line from his work on morality in finance, and the issue of multinational structures established specifically to cut tax liabilities.

“I think we under-appreciate how hard this problem is,” he says, noting that the concept of everyone paying their fair share is “philosophically and conceptually, a hard thing to enact”.