Jacob Bogatin: why is finance so tricky?

Jacob Bogatin tries to answer this question: “Why is it so easy for us to complicate the sphere of finance?” In his opinion, the “Flynn effect,” which consists in gradually increasing the level of the human intellect, can be the answer. The field of finance, therefore, becomes more complicated over time, because financiers become smart enough to complicate it.

Jacob Bogatin is quite an interesting hypothesis.

The sphere of finance has never been dull. To be more precise, it has always been opaque, and its complexity has served only as an excuse in a society claiming to be an open one. Opacity is necessary in the modern world of finance. It is instead its characteristic feature, rather than a defect. To reduce the complexity and increase the transparency of this sphere can only be drastically changed the approach to the adoption of economic risks. The primary objective of the modern financial system is to convince citizens that they must take risks that they would not have accepted to accept, being fully informed.

Financial systems help us in solving the problems of collective action. If the risks and cost of investment projects were public information, most of us would be intimidated by the details. Entrepreneurship is a somewhat risky business. Moreover, the probability of success of a particular project depends on the direction of development of other projects. If an adherent of industrial development, living in an agrarian society, is trying to build an automobile plant, he is unlikely to succeed. Jacob Bogatin says that suppliers will not be able to provide the resources needed to achieve their goals. Even if, by a lucky chance, he manages to start production, there will be no one to buy the goods: farmers with low labor productivity will not have money for the car. Successful investments are made not in individual projects, but in the stream of enterprises organized by interested groups, most of which suffer a complete failure and only some do something useful and increase the state of their investors. Also, there are no winners without losers: in the world where Qwest did not overproduce fiber, Amazon would not appear, which loses several cents on each order but compensates its expenses due to a large volume of sales. Jacob Bogatin remarks that even considering the incredible technological boom, in 1997 the investment in Amazon was found far from the most reliable. It would be foolish to invest this in the company if there were no growth and dynamics achieved at the expense of thousands of partner companies, only some of which subsequently succeeded in business.

One of the tasks of financial systems, according to Jacob Bogatin, is to ensure dynamics with a high level of investment activity, in contrast to a static state with a low level of investment activity. In the situation of a sharp increase in the investment of people, one can be persuaded of taking a direct part in a risky project. However, in the absence of such growth, a cautious person, for sure, refuses, says Jacob Bogatin.