Aug 11, 2017
Mihir Desai is author of “The Wisdom of Finance: Discovering
Humanity in the World of Risk and Return.” Mihir is currently the
Mizuho Financial Group Professor of Finance at Harvard Business
School and a Professor of Law at Harvard Law School.
He wrote his new book with two goals in mind: 1. Demystifying
finance and 2. Have people look at finance in a more inspirational
way. After each financial bubble bursts, the public repeatedly
retreats to stereotypical ideas of finance. Mihir doesn’t want to
wait for a generational shift to take place for finance to be
looked at in a positive light. Financial literacy has gone by the
way side in schools. How do you get children to think about basic
risk taking? How do you think about protecting yourself? How do you
buy insurance? How do you pool your money as a family? He hopes his
book may help change some views and enlighten.
Mihir explains why diversification isn’t important just in the
markets, it is important to diversify in all aspects of life. As an
athlete you should workout all your muscles not just pinpoint one
area. Or if you are looking at your health, you should look at all
aspects of your health, not just what you are eating or how you are
sleeping. Broaden your outlook and diversify your time and energy
accordingly.
What is Agency theory? If you give someone money to invest, why do
you get the money back? Arguably this is the biggest problem in
modern finance. 150 years ago most people were self employed.
Nowadays we appoint people as our “agents”. We have a system where
we give money to people we don’t know and expect them to take care
of it. Michael and Mihir end the conversation talking about people
finding their path and true happiness in life rather than doing
what their parents or society has told them to do.
In this episode of Trend Following Radio:
- Reputation of finance
- Diversification
- Risk management
- Black-Scholes model
- Behavioral phenomena
- The magic of leverage
- The asshole theory of finance
- Agency theory