The world of finance has a dark side, but that’s only half the story – PBS – PBS NewsHour

JUDY WOODRUFF: When it comes to Wall Street, many people think of money and greed, but a professor at Harvard Business School argues there’s a lot more to the world of finance, and he uses books and movies to make his case.

Our economics correspondent Paul Solman has the story.

It’s part of our series Making Sense, which airs every Thursday.

ACTORS: One, two, three!

(CHEERING AND APPLAUSE)

PAUL SOLMAN: The field of finance, you might say it has an image problem. Consider “The Wolf of Wall Street,” based on a real-life character.

LEONARDO DICAPRIO, Actor: If anybody here thinks I’m superficial or materialistic, go get a job at McDonald’s, because that’s where you (EXPLETIVE DELETED) belong.

(CHEERING AND APPLAUSE)

PAUL SOLMAN: Investment banker Patrick Bateman in “American Psycho” is fictional, but not entirely implausible.

CHRISTIAN BALE, Actor: I have all the characteristics of a human being, flesh, blood, skin, hair, but not a single clear, identifiable emotion, except for greed and disgust.

MICHAEL DOUGLAS, Actor: I am not a destroyer of companies.

PAUL SOLMAN: Hey, finance has had an image problem since buyout bro Gordon Gekko graced the silver screen 30 years ago.

MICHAEL DOUGLAS: The point is, ladies and gentlemen that greed, for lack of a better word, is good.

ACTOR: Big bank, small bank, I like to make money. All right?

PAUL SOLMAN: And the real events of the 2008 financial crisis only made matters worse.

ACTOR: That’s America’s housing market.

PAUL SOLMAN: But Harvard Business School’s Mihir Desai says there are two faces to finance, though he readily acknowledges the dark one to his students.

MIHIR DESAI, Harvard Business School: Many people demonize what you do, and it’s hard to live that way.

PAUL SOLMAN: And he told me he gets why that perception is so pervasive.

MIHIR DESAI: When you have real-life figures like Martin Shkreli, who was both a hedge fund trader and then took over a pharmaceutical company, jacked up prices by 5000 percent, subsequently engaged in a variety of nefarious behavior, and very proudly so, so it almost makes you feel like real life is outpacing fiction.

PAUL SOLMAN: Desai has written a book to try to balance the picture, “The Wisdom of Finance.”

MIHIR DESAI: The goal in the book is to try to demystify finance so that the people who currently demonize it will come to understand it, as opposed to simply oppose it.

And then for the people who are in finance, we have to get back to the ideas. The ideas matter.

PAUL SOLMAN: To Professor Desai, the big idea of finance is illustrated by the Quincunx machine in Boston’s Museum of Science: the ability to find order in a seemingly random, and therefore risk-forsaken, world.

MIHIR DESAI: This was a real revolution in probability, which is random things happening results in predictable patterns.

PAUL SOLMAN: Balls drop, bounce randomly left or right as they encounter the pins, and eventually hit bottom to form a bell-shaped curve.

MIHIR DESAI: Things that seem random actually end up resulting in a very orderly pattern, in fact, this bell-shaped distribution or normal distribution. And that, of course, is the foundation of finance, because you observe a lot of random things, but it ends up behaving in predictable ways.

PAUL SOLMAN: Randomness and its risks are everywhere. Finance’s job, to try to manage them. Case in point? The income plight of women throughout most of history.

ACTOR: You should consider that it is by no means certain that another offer of marriage may ever be made to you.

MIHIR DESAI: Mr. Collins, who delivers the worst proposal ever to Lizzy Bennet in “Pride and Prejudice.”

ACTOR: I am well aware that 1,000 pounds is all you may ever be entitled to, but rest assured I shall never reproach on that score when we are married.

MIHIR DESAI: You’re not that wealthy, you’re not that pretty, you have an offer on the table today from me. You would better take it.

PAUL SOLMAN: It’s the great economic risk faced by all Jane Austen’s Bennet girls, but says Desai:

MIHIR DESAI: Lizzy turns down Mr. Collins, and the advice of her mother, because she wants to roll the dice again. Of course, that ends up very nicely, ultimately, with Mr. Darcy, but, at the time, she didn’t know.

PAUL SOLMAN: No, Lizzy was lucky in love and money. She accepted the risk. But most others didn’t.

MIHIR DESAI: The next day, he gives the same proposal to Charlotte, her friend, and she takes it.

ACTOR: Cousin Elizabeth, you can see before you the happiest of men.

PAUL SOLMAN: Charlotte Lucas’ lot wasn’t the happiest, but better than penury, one imagines.

MIHIR DESAI: She said, I’m just going to take the solution.

PAUL SOLMAN: In Anthony Trollope “Phineas Finn”:

ACTOR: How nice to find you and to find you alone.

PAUL SOLMAN: Violet Effingham had a very different problem: too many suitors.

ACTRESS: And you look very piratical tonight, Lord Chiltern.

ACTOR: That is because you see me by the side of all these smug, glossy parliament men.

MIHIR DESAI: She doesn’t know who to choose, and she says, you know, if only I could marry all 10. You know, she’s the essence of diversification.

PAUL SOLMAN: Because then you wouldn’t have all your eggs in one basket. You would have 10 different guys, 10 different fortunes.

MIHIR DESAI: Exactly. The intuition that you can lower risk by dividing resources is extremely old. That diversification idea goes back to shipping, when you split up your cargo across routes. It goes back to agriculture, when people would split up their land.

In Ecclesiastes, we see the advice to invest in seven ventures — no, eight ventures, because you never know what disaster will happen.

PAUL SOLMAN: So this is the benign face of finance. It allows you to protect against risk by, among other things, diversifying your investments. But then there’s the dark face again.

When you invest, you’re still stuck with the risk of giving your money to someone else.

MIHIR DESAI: I gave my money to Tim Cook, who runs Apple, and I own one share. Here’s the problem. I can’t watch Tim Cook. So the underlying problem becomes, well, wait a second, how do I monitor that guy? How do I watch that guy? How do I make sure he’s doing the right thing for me?

PAUL SOLMAN: This is the principal-agent problem. The principal is the shareholder, who has the wealth. The agent is the manager entrusted with it.

ACTOR: If you only know what I went through for you.

PAUL SOLMAN: And principals and agents can have conflicting interests, in the case of “The Producers,” extremely conflicting.

GENE WILDER, Actor: It’s absolutely amazing that, under the right circumstances, a producer could make more money with a flop than he could with a hit.

MIHIR DESAI: The essence of “The Producers” is that these two folks, Bialystock and Bloom, want to rip off a bunch of investors, and by creating a flop, the investors won’t want their money back. They raised 25000 percent of what they actually need. They create this — what they think is going to be a flop, “Springtime For Hitler,” and, of course, it becomes a hit, and they go to jail.

These investors trusted Bialystock and Bloom. They couldn’t actually monitor them. They turned out to be bad eggs. That is the problem with capital markets. That is the problem with me giving money to people and not knowing what they end up doing.

PAUL SOLMAN: But, of course, for every Bialystock, there’s a Buffett, for every Bernie Madoff, 1,000 honest brokers, because there have always been two faces of finance.

MIHIR DESAI: This is actually my favorite book about finance. It’s from 1688.

PAUL SOLMAN: Yes, a good year for finance.

MIHIR DESAI: And it was “Confusion de Confusiones.”

He basically describes finance as the most noble profession, as well as the most notorious profession. I think we have lost sense of the nobility part that he describes, and we tend to focus on the negative.

PAUL SOLMAN: Desai, wanting to accentuate the positive, uses an exemplar of finance from Willa Cather’s 19th century novel, “O Pioneers!”

MIHIR DESAI: Alexandra Bergson is this wonderful character who is a farmer, who starts by basically doing a leveraged buyout of farms near where she lives.

PAUL SOLMAN: She borrows money in order to buy.

MIHIR DESAI: She borrows a bunch of money to buy all of these farms.

ACTRESS: Now, I have figured it out. We sell most of the cattle e and the corn we have left over. We buy the Lindstrom place. Then we take out two loans on our half-section and buy Peter Crow’s place.

MIHIR DESAI: She ends up engaging in transactions that would be in any finance textbook. But she never loses sight of who she is. She never behaves in ways that would suggest that she thinks everything is due to her skill, as opposed to luck. She’s very conscious of and very humble of her outcome.

ACTOR: You have worked wonders with this land, Alexandra.

ACTRESS: Oh, we hadn’t any of us much to do with it, Carl. The land did it.

MIHIR DESAI: We really need good stories about finance, because good stories will guide good behavior.

PAUL SOLMAN: It’s a lesson Desai tries to teach his students.

MIHIR DESAI: Pick your stories carefully, because you will live your life by these stories. Some of you might pick Gordon Gekko. I don’t recommend it. Alexandra Bergson is a fantastic model.

PAUL SOLMAN: For the PBS NewsHour, this is economics correspondent Paul Solman reporting from Boston.

JUDY WOODRUFF: Who knew by watching all these films that you could get great economic advice?

So, while writing his book, Professor Desai says he was surprised to discover how many great writers, painters and musicians also held jobs in finance.

You can test your own knowledge of these entrepreneurial artists with our online quiz at PBS.org/NewsHour.

The world of finance has a dark side, but that’s only half the story – PBS – PBS NewsHour}