The Guru’s Three Laws of Finance
Different financial economists may use different lists of fundamental principles but I have found the three related to me when I was anointed a Priestess of Finance at a sacred ceremony after years of study and contemplation, to be the most robust and concise. Imagine receiving a note instructing you to come alone to a room on a remote part of campus at midnight on a certain night and when you arrive, hooded figures cradling candles escort you across a floor strewn with hundreds of Federal Reserve Notes of various denominations. As incense wafts through the room you are escorted to the feet of the finance guru who congratulates you and proceeds to tell you the three laws upon which all finance is built. As this is the information age and few things are cloaked in mystery any more, for the price of your tuition I will impart these most cherished and valuable laws to you.
- More is better than less
- Sooner is better than later
- Certainty is preferable to risk
There it is! These are what move financial markets and guides human behavior. They are not hypotheses. They are laws which have been tested by governments and religions and yet humans continue to prefer they and/or their children have more, not less. They’d rather have wealth now rather than five generations from now. Also, they’d rather have the promise of payment in a stable currency from a financially dependable promisor.
An experiment on children was conducted where they were sat at a table with a marshmallow on a dish in front of them. They were told they could eat it at any time but if they wait a requisite number of minutes, the marshmallow would be matched with a second one for them to have. They tracked the children into adulthood and noticed that those who could or would forego immediate gratification achieved much more than those who ate the marshmallow without waiting for the doubling.
Do you see these behaviors played out among the members of your family, friends, co-workers, neighbors, yourself? Of course you do. In fact, some argue that decades ago the working class made acquisitions through thrift and their pay. More recently, our wants are satisfied through debt. Did you see the financial crisis coming? Could it happen again?
I usually begin my first finance class by informing them that economics is often referred to as the dismal science. I welcome them to finance which is the dark side of that dismal science. I also say I teach the golden rule: Gold Rules! This is a bit of an oversimplification, but not much. Tell me what you value and I’ll nod pleasantly. Show me where you put your time, money, and energy and that will inform me as to what you truly value.
Take heart and consider that decades ago savers were relegated to the feeble returns from, say, a local bank because participation in money markets required sums exceeding $100,000. Nowadays, savers can make risk-adjusted returns that our grandparents could only dream of with only a few hundred dollars invested each month. This democratization of capital is a boon for those of us (a) who have the good fortune of not being financially wiped out from, e.g., unemployment, uninsured medical, a needy child or parent, etc., and (b) who can resist our urges. As you read and research, you will discover how these things came about and how important they are to your profession, your family, and our communities.
The practical applications of these principles are seen in thousands of markets trading billions of securities every fraction of every second of every day. Finance is a mighty tool. May you learn it and use it well—