Tears filled up her eyes rapidly. Her lips trembled. Her hands were shaking as she shockingly witnessed the final rate of return to be negative 47%. My friend, who had been saving for her upcoming wedding ever since she had started working, lost about half of what she invested in equity-linked security (ELKS). Eager to yield double-digit return amongst low interest rates that had continued for a long time, my friend became audacious enough to invest most of her deposit in a single structured product which seemed to have relatively safe underlying assets such as Samsung Electronics and Samsung Securities. However, who could have imagined that those which appeared too big to fail could fall?
This terror of losing half of investment was not limited to my innocent friend who had been working for fixed income, currencies and commodities division for several years herself. The stock prices of top 3 Korean securities firms which were linked to ELKS plummeted 57% in average from 2011 to 2014. Accordingly, 175 million dollars that were invested from January to April 2011 shrunk to 75 million dollars by April 2014. What happened to the rest of 100 million dollars? They did not just evaporate. There must have been some winners in this battle. The originators of these instruments and institutional investors who placed opposite bets would have gained thanks to retail investors’ speculative behavior. But I wonder how void the individuals in the shoes of originators and institutional investors must have felt, having to bitterly smile at the cost of others’ tears.
Money may not be the sufficient condition to happiness. Nonetheless, deprivation of money is sufficient condition to evoke all sorts of negative emotions. After the financial crisis in 2008, there has been anger toward financial community, leading to movements such as “Occupy Wall Street.” As a professor who had been teaching undergraduate students on finance for 25 years at Yale University, Robert J. Shiller wrote Finance and the Good Society to contemplate whether the financial capitalism—where he dedicated his life educating thousands of his students to devote for—is heading the right direction.
The first part of the book arrays the roles and responsibilities of different occupations in finance sector. Following that, Shiller presents enlightening studies and attempts that took place in history. There are also insightful analysis of recent trends and innovative ideas to experiment in the future. He touches on numerous issues I have been involved with as well. As for me who have been swimming in the sea of finance for the past six years—three years in conventional realm and another three years in novel space where social and environmental impact is more incorporated—this book answers many queries I have had for years. With regard to the ELKS case for instance, the book heralds that professional investment managers do not seem to do particularly well in selecting their own personal portfolios either and how emotional investment decision can raid one’s life savings and therefore must take into account of the social milieu and of the collective psychology. Shiller articulates in ways no one in the field could, with strong evidences and back up data that have been accumulated in academia.
Finance does not embody a goal. Finance is not about “making money” per se. It is a “functional” science in that it exists to support other goals—those of society.
Shiller warned that the housing market had a bubble in 2000 prior to the break out of financial crisis and was awarded the 2013 Nobel Prize in Economics for predicting market inefficiency. Although financial capitalism may not be perfect as of now, Shiller promises the blueprint of evolving future.
Financial capitalism is an invention, and the process of inventing it is hardly over. The system has to be thoughtfully guided into the future. Most importantly, it has to be further expanded and democratized and humanized, so that we may reach a time when financial institutions will be even more pervasive and positive in their impact. That means giving people the ability to participate in the financial system as equals, with full access to information and with resources, both human and electronic, to make active and intelligent use of their opportunities. It will mean that they truly consider themselves part of modern financial capitalism, and not the victims of the aggressive of the most up-to-date financial theory, as well as the research revolution in behavioral economics and behavioral finance that has explored the real human limitations that inhibit rational and humane decision making. Creating and implementing such inventions will be the best tactic to deal with economic equality. This future is in the hands of the people, old as well as young, who might read this book.
I am grateful to my supervisor for recommending me this book when I was most doubtful of the work I was doing. Now I am fully revitalized by the wisdom Shiller shared and am ready to embark for the experiments yet to be explored in order to enable finance to function better in society!
Also posted here.