Jane Austen’s heroines can teach us a lot about risk management, says Harvard professor Mihir Desai

INTRO: Finance has become so complicated and jargonised that few outsiders understand it. Mihir Desai, who teaches at Harvard’s business and law schools, in his book The Wisdom of Finance, uses humanities to rehabilitate and demystify finance. He tells Narayanan Krishnaswami how finance can be fixed.


Ever since the financial crisis of 2007-08, there has been hostility towards corporations. Why?

The main reason that corporations face hostility is that people have convinced themselves that capitalism isn’t working. The puzzle, in a way, is that the great successes of market-based capitalism, have been greeted with great unhappiness because of some outcomes. And that’s the central conundrum. I’m not trying to suggest that everything is great. All I am saying is that the notion that everything is going to hell is not true. There are areas where we aren’t doing well — particularly the risk of environmental catastrophes, the stagnation of median wages in developed countries, and nuclear proliferation. But in economic terms, there is a lot to be proud of — just think of the people lifted out of poverty in the last three decades. Moreover, I’m more worried about the kinds of policies that will be pursued because of people’s perception that capitalism is evil. That’s a much greater danger.

You believe finance needs to be fixed. Can you explain?
I am trying to demystify finance for those outside the system and rehabilitate it for those inside. The way to make finance better is to make people in finance understand the human consequences of their decisions. People in finance get wrapped up in screens and spreadsheets and that’s problematic. We tend to focus on the negative aspects of it, forgetting the positive things that finance can do. What I’m trying to do is correct that imbalance.
Take lending and borrowing. You can view that as a terrible thing, and people through history have. Socrates hated the idea. So have many great thinkers. Several religions have taken a dim view of lending money for interest. Other thinkers have understood its power. Jeremy Bentham, for example, understood that without borrowing and lending, the only people who could ever do anything were the rich. Nietzsche wrote about it as well, saying that if you want to understand man, you need to understand the borrowing and lending relationship. Finance is not outside humanity, it is deeply embedded in who we are.

So what’s the solution?
One is more regulation (which I am in favour of), but that can have negative and unintended consequences. I also wouldn’t put too much faith in regulation because most regulators are captured by the industry in one way or another. The other way would be the way of Occupy (referring to the Occupy Wall Street movement in New York in 2011) and protest, but that wouldn’t be terribly helpful. The best solution is to get practitioners re-grounded in the underlying nobility of the ideas of finance.

So, you use examples from the humanities to make your case?
Yes. For example, a lot of life is about risk management. We have choices, and each choice has risk associated with it. We manage risk when we make choices. As an example, in Pride and Prejudice, Jane Austen makes it clear that while men get to make mistakes, young women don’t. The central plot line of most of Austen’s novels features young women faced with a risky set of choices. Suitors come along, and they have to decide which suitor to pick. The interesting thing is, most of Jane Austen’s heroines voice “modern” risk management strategies.
I also talk about Anthony Trollope’s Phineas Finn, where a woman is faced with the same kind of problem. And at one point she’s talking to a friend, and the friend says, “How are you going to choose between these ten suitors?” One is handsome, but a drunk. Another is rich but a bore. One is funny but poor. And, at one point, she says, “If only I could marry all ten” — which of course is the financial logic of diversification, a fundamental part of risk management. At another point, she talks about what is essentially an options strategy. So, these are all basic strategies that we talk about in finance, but in a way that’s much more connected to the human experience.

Over the past year, there have been several references to economics as the “new astrology”. What’s your take on this as an economist?
To me, economics is inherently a social phenomenon where we use scientific methods to guide our predictions. Is it imperfect? Absolutely. Those of us who are in the field understand its ambiguities perfectly well. But there are economists who argue their points with too much confidence, and they don’t explain why they make the predictions they do. At the same time, there’s error in the way we expect people to predict very complex phenomena with precision — we actually demand it. And there is always a demand for astrologers, for people who claim to be able to see the future.