Project for Philosophical Evaluations of the Economy |
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The Business of Risk-Taking
Dialog on financial investing, between Noah denkt™ and its Alter Ego, first drafted on Feb. 17,
published on Feb. 22, 2009
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Question by Noah denkt™ (Nd): Have you seen David Faber’s documentary “House of Cards” (aired (again) on
CNBC on Feb. 16) , which tracks the current economic crisis from its origins up to now?
Answer by Alter Ego of Noah denkt™ (AE): Yes, I have. Why are you asking? Didn’t you like it?
Nd: No, we liked it at lot. But, still, there was one issue therein that keeps us going even today?
AE: And what is that?
Nd: It is the show of incredulity that Mr. Faber so aptly puts on, when he is discussing the fact that the city of
Narvik invested into Collateralized Debt Obligations without really understanding them?
AE: But why would Mr. Faber’s incredulity irk Noah denkt™? After all, it should be standard expectation to invest
only into those vehicles that are actually being understood by the respective investor?
Nd: You think so?
AE: You don’t?
Nd: Well, if you look at it closely, it seems to us, that there isn’t a single financial instrument that can be fully
understood by anyone. Just think about what is going on in the relatively well investigated sector of mergers and
acquisitions. Hasn’t it been proven here time and time again, that not even a due diligence examination can
uncover all the intricacies that the acquiring company should be aware of when purchasing a second one? And if
the record is so dismal in this area how can it be any better in others. After all, no outside buyer will ever be able
to develop that depth of inside knowledge that would justify his investments to be qualified as fully understood.
AE: Granted. But don’t you think that it, still, makes a quite a difference whether you buy a CDO whose structure
and mechanics you have no clue about or whether you buy a 2-year Treasury bond, whose business proposition
is, in the end, pretty much straight forward?
Nd: Surely there is a difference between one and the other. But that difference is not a substantive one. Much
rather is it a question of the degree of uncertainty that you are willing to engage in here.
AE: In matters of financial gain and loss however, even a degree of uncertainty is noteworthy, isn’t it?
Nd: Of course, and that is why there is, rightly so, an extra risk premium involved, if you, for instance, invest into
puts and calls.
AE: So is it Noah denkt™’s opinion then, that all financial investment is ultimately an irresponsible act?
Nd: Certainly not. After all, every human activity has this speculative component to it. And so it would be ridiculous
to even think about wanting to ban this. For it is way too essential for the human survival to embrace a certain
belief factor that you could now still wish to discredit that. - At the same time though, it should be clear to
everyone, that all financial investment is ultimately based on the interpretation of circumstantial evidence and that
hence, no such activity can ever fully fathom the uncertainties that it is embarking on.
AE: But did Mr. Faber ever suggest that a risk-free certainty was attainable in financial matters?
Nd: Well, his show of incredulity in the aforementioned instance, at least, let it be implied that n investment activity
might be possible which is not primarily based on circumstantial perception and belief. And that is creating a spin
here, which we definitely do not like.
AE: Okay. So you should welcome the chance then to set the record straight here.
Nd: In deed, we do.
AE: Good. Can we leave it at that then?
Nd: Yes, we can.
AE: Perfect.
Dialog on financial investing, between Noah denkt™ and its Alter Ego, first drafted on Feb. 17,
published on Feb. 22, 2009
-----------------------------------------------------------------------------------------------------------------------------------------
Question by Noah denkt™ (Nd): Have you seen David Faber’s documentary “House of Cards” (aired (again) on
CNBC on Feb. 16) , which tracks the current economic crisis from its origins up to now?
Answer by Alter Ego of Noah denkt™ (AE): Yes, I have. Why are you asking? Didn’t you like it?
Nd: No, we liked it at lot. But, still, there was one issue therein that keeps us going even today?
AE: And what is that?
Nd: It is the show of incredulity that Mr. Faber so aptly puts on, when he is discussing the fact that the city of
Narvik invested into Collateralized Debt Obligations without really understanding them?
AE: But why would Mr. Faber’s incredulity irk Noah denkt™? After all, it should be standard expectation to invest
only into those vehicles that are actually being understood by the respective investor?
Nd: You think so?
AE: You don’t?
Nd: Well, if you look at it closely, it seems to us, that there isn’t a single financial instrument that can be fully
understood by anyone. Just think about what is going on in the relatively well investigated sector of mergers and
acquisitions. Hasn’t it been proven here time and time again, that not even a due diligence examination can
uncover all the intricacies that the acquiring company should be aware of when purchasing a second one? And if
the record is so dismal in this area how can it be any better in others. After all, no outside buyer will ever be able
to develop that depth of inside knowledge that would justify his investments to be qualified as fully understood.
AE: Granted. But don’t you think that it, still, makes a quite a difference whether you buy a CDO whose structure
and mechanics you have no clue about or whether you buy a 2-year Treasury bond, whose business proposition
is, in the end, pretty much straight forward?
Nd: Surely there is a difference between one and the other. But that difference is not a substantive one. Much
rather is it a question of the degree of uncertainty that you are willing to engage in here.
AE: In matters of financial gain and loss however, even a degree of uncertainty is noteworthy, isn’t it?
Nd: Of course, and that is why there is, rightly so, an extra risk premium involved, if you, for instance, invest into
puts and calls.
AE: So is it Noah denkt™’s opinion then, that all financial investment is ultimately an irresponsible act?
Nd: Certainly not. After all, every human activity has this speculative component to it. And so it would be ridiculous
to even think about wanting to ban this. For it is way too essential for the human survival to embrace a certain
belief factor that you could now still wish to discredit that. - At the same time though, it should be clear to
everyone, that all financial investment is ultimately based on the interpretation of circumstantial evidence and that
hence, no such activity can ever fully fathom the uncertainties that it is embarking on.
AE: But did Mr. Faber ever suggest that a risk-free certainty was attainable in financial matters?
Nd: Well, his show of incredulity in the aforementioned instance, at least, let it be implied that n investment activity
might be possible which is not primarily based on circumstantial perception and belief. And that is creating a spin
here, which we definitely do not like.
AE: Okay. So you should welcome the chance then to set the record straight here.
Nd: In deed, we do.
AE: Good. Can we leave it at that then?
Nd: Yes, we can.
AE: Perfect.
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