In his January 2, 2015 Wall Street Journal essay, columnist Holman Jenkins makes a compelling case for the principle of shareholder value maximization by noting that owners seeking to maximize the value of their businesses end up doing a pretty decent job of satisfying customer and employees along the way. Think of this essay as a 2015 sequel to Milton Friedman’s famous New York Times Magazine essay (published September 13, 1970) entitled “The Social Responsibility of Business is to Increase its Profits” (see http://bit.ly/Social_Responsibility_of_Business for Friedman’s essay; Thomas Coleman provides important context in his recent (2013) essay about Friedman entitled “Corporate Social Responsibility: Friedman’s View @ http://bfi.uchicago.edu/feature-story/corporate-social-responsibilty-friedmans-view)…
Clearly insurance is an enabling technology; without insurance many if not most large-scale commercial activities would grind to a halt. In a Business Week article entitled “The Unexpected Threat to Super Bowl XLIX“, Wharton professors Howard Kunreuther and Erwann Michel-Kerjan point out that that if Congress decides not to renew the Terrorism Risk Insurance Act (TRIA) (set to expire on Dec. 31), there is a chance that the Super Bowl might not be played. Will Warren Buffet step in as an insurer of last resort if TRIA is not reauthorized? Also, Gordon Woo raises some excellent points about possible private sector alternatives to TRIA in his blog posting entitled “RMS and the FIFA World Cup: Insuring Against Terrorism“.
In my opinion, the following 3 books are particularly worthwhile for students who are interested in learning more about finance and risk management:
- Against the Gods: The Remarkable Story of Risk, by Peter L. Bernstein.
- A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, by Burton G. Malkiel.
- Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, by Jeremy J. Siegel.
Philosophically, these books present what I would consider to be an “orthodox” perspective; i.e., they fit well with the so-called rational choice, efficient markets view of the world which is prevalent in most departments of finance and economics. For some “heterodox” alternatives, I like (but am nevertheless highly critical of) both of Nicholas Taleb’s books:
- Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (read this first).
- The Black Swan: The Impact of the Highly Improbable (the sequel to “Fooled by Randomness”).
Finally, I would be remiss to not also include two other favorites which are not books on finance or economics; rather they deal with the history and philosophy of applied mathematics. These books include:
- Innumeracy: Mathematical Illiteracy and Its Consequences, by John Allen Paulos.
- A Brief History of Infinity, by Brian Clegg.
From The Economist:
“This week we publish an essay on the history of finance in five crises. They have a common theme: in each case the state increased the subsidies and guarantees it gave to finance—and helped set up the next crisis. Our cover leader points out that this is happening again. An American can now blindly put $250,000 in a bank, knowing his deposit is insured by the state. Finance, we say, should be treated more like other industries.”
Quoting from my annual Social Security Statement; I can’t help but wonder what the numbers are for “optimistic” assumptions and for “pessimistic” assumptions (see the “fine print” by the asterisk below):
About Social Security’s future…
Social Security is a compact between generations. Since 1935, America has kept the promise of security for its workers and their families. Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement.
Without changes, in 2033 the Social Security Trust Fund will be able to pay only about 77 cents for each dollar of scheduled benefits.* We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations.
* These estimates are based on the intermediate assumptions from the Social Security Trustees’ Annual Report to the Congress.
About Social Security’s future… Social Security is a compact between generations. Since 1935, America has kept the promise of security for its workers and their families. Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement. Without changes, in 2033 the Social Security Trust Fund will be able to pay only about 77 cents for each dollar of scheduled benefits.* We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations. * These estimates are based on the intermediate assumptions from the Social Security Trustees’ Annual Report to the Congress. ]]>
This year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (AKA the Nobel Prize in Economics) goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University) for “…their empirical analysis of asset prices”. In retrospect, it has never been a question of whether Fama would receive the Nobel Prize; it has always been a question of when, and when is now.
In a nutshell, Fama is famous for his “efficient market hypothesis” as well as a number of important empirical asset pricing contributions. Fama’s Chicago colleague Lars Hansen is famous for his work in financial econometrics, and Shiller provides an important behavioral counterpoint to the efficient market theory.
Here are articles worth reading about this prize:
1. The “official” announcement posted at Nobelprize.org: “The Prize in Economic Sciences 2013″. Nobelprize.org. Nobel Media AB 2013. Web. 14 Oct 2013. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/
2. Wall Street Journal (10/14/2013): U.S. Trio Wins Nobel Economics Prize
3. Also, a trio of postings this morning by University of Chicago finance professor John Cochrane (10/14/2013)
c. Understanding Asset Prices (this is the Nobel Committee’s “scientific background” paper which explains why the Fama, Hansen, and Shiller received this award)
From Knowledge@Wharton: “How do we know which of our successes and failures can be attributed to either skill or luck? That is the question that investment strategist Michael J. Mauboussin explores in his book “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing”. Wharton management professor Adam M. Grant recently sat down with Mauboussin to talk about the paradox of skill, the conditions for luck and how to mitigate against overconfidence.”
I also recommend Mauboussin’s book entitled “Think Twice: Harnessing the Power of Counterintuition”. Mauboussin does a wonderful job explaining how to use modern social science findings (particularly behavioral finance) to become a better decision-maker when facing risk and uncertainty.
Quoting from this article, “The efficient markets hypothesis is surely false. What is striking is that it is very close to being true. For the Warren Buffetts of the world, “almost true” is not true at all. For the rest of us, beating the market remains an elusive dream.”