I’ve said several times that finance is really just code. Like software, it’s an abstraction skin pulled over physical features. One can feel a bit disembodied if their formulation of the world for 8-12 hours a day are prices. Prices that collapse all of human enterprise, from the dirt under its fingernails to the sunrises and sunsets between now and some expiration date, into some Excel number format.
Just as software intermediates for less, financial innovation lowers the cost of go-betweens. In finance, the things went-between are people paying to offload risk to people looking to get paid for warehousing risk. In software and finance, skimming a tiny bit of rent on those transactions is lucrative.
How good or bad we can feel about the degree of skimming depends on how much surplus is created versus the higher friction model. The value of information liquidity is fairly obvious so Google enjoyed a positive reputation for at least its first decade in business. Meanwhile, finance feels like a constant barrage of “what did Wells Fargo do now?” or words that rhyme with Fonzi. People outside finance can be excused for having a dim, albeit biased, view of the profession since nobody reports on people doing an honest job.
With that in mind, I leave you with Mitchell’s understandable question:
does anyone remember a thread on how to talk about trading as a profession (explaining that it is not innately malicious) when speaking to friends or family? I thought maybe @KrisAbdelmessih @bennpeifert or @AgustinLebron3 mentioned it but am having trouble finding it
— Mitchell Rosenthal (@M1tchRosenthal) February 26, 2022
Here’s my quick response:
Let me try.
If there was no insurance, risk stays on books of less efficient holder.
Insurance = risk pooling
Speculator = efficient risk pooler who understands correlation
Efficient risk allocation = lower cost of capital for primary investment
Primary investment ➡️ growth https://t.co/N8xFWz4C2U
— Kris (@KrisAbdelmessih) November 29, 2020
1/ From my DMs: "Sometimes I get existential dread […] thinking I'm not contributing anything to society simply by trading as a job."
— Agustin Lebron (@AgustinLebron3) January 16, 2022
I’ll wrap with a footnote from a recent post:
The slicing and dicing of risk is finance’s salutary arrow of progress. Real economic growth is human progress in its battle against entropy. By farming, we can specialize. By pooling risk, we can underwrite giant human endeavors with the risk spread out tolerably. People might not sink the bulk of their net worth into a home if it wasn’t insurable. Financial innovation is matching a hedger with the most efficient holder of the risk. It’s matching risk-takers who need capital, with savers who are willing to earn a risk premium. Finance gets a bad rap for being a large part of the economy, and there are many headlines that enflame that view. I, myself, have a dim view of many financial practices. I have likened asset management to the vitamin industry — it sells noise as signal. But the story of finance broadly goes hand in hand with human progress. It might not be “God’s work” as Goldman’s boss once cringe-blurted, but its most extreme detractors as well as the legions of “I wish I was doing something more meaningful with my life” soldiers are discounting the value of its function which is buried in abstraction. Finance is code, so if software is eating the world, financialization is its dinner date.