Modern finance is based on the idea that the value of a financial asset is equal to the present value (that is to say brought back into contemporary monetary units) of the expected future profits.
Things look like this: we estimate the future income from this asset, obviously without knowing them, and then we deduct two elements: on the one hand, the price of “pure” time, which we call the risk-free interest rate, and, on the other hand, a risk premium, which is nothing other than the level of uncertainty associated with the future income that we want to discount. Discounting is therefore constrained by two uncertainties: the future and its level of variability. We can see that all of this is very fragile. The idea is that the risk premium can turn into a return, but no one knows when. It is for this reason that it is called risk premium: we take a risk to hope for a premium, that is to say a return.
Is all this sound from an intellectual point of view? Quite honestly, and although I’ve been teaching it for thirty years, I don’t know. It resembles a horoscope or haruspicine, that is to say the divinatory art of reading the entrails of a sacrificed animal to draw omens about the future.
Only the Almighty, who is himself consubstantial with time, and omniscient can afford to reduce the interest rate to zero and eliminate any risk premium, since he knows the future. This leads to any financial asset measured by humans being worth less than divine valuation, which is eminently venerable.
But since humans must commit to the future to find out if it matches their estimate in order to remove the uncertainty associated with their own estimate, assets with no maturity, such as stocks, must reach infinity, which approximates to divinity. No one knows, in fact, when this risk premium will be transformed into a return. And, as Woody Allen said: Eternity is a long time…. Especially towards the end.
This is why the financial markets are huge casino carpets on which we throw dice and then we run, we run, we run to see what will be the stabilized combination that will allow us to collect the Grail of the premium of risk, but the human being mortal, it is his successor to continue this race without respite. Until infinity…divine.
Except, of course, for investment bankers who take shortcuts on this huge timeline, which led Lloyd Blankfein, then CEO of Goldman Sachs in 2009, to claim that he was doing God’s work. Nothing less, before the final judgment…
But that’s not all: speculative capitalism is based on market efficiency. This last concept postulates that the prices of assets reflect all the information available about them. If the financial markets are efficient, then it is impossible to do better than the market.
We understand the schizophrenic character of this concept since the economic agents know that they must fight the market by their speculative acts while knowing that it is impossible for them to systematically beat its performance. Men fight against a perfection and an outcome that is forbidden to them.
This is of the same nature as Catholic perfection: it is impossible, since suicide is theologically forbidden, to reach the same level of purity as Christ, crucified by men.
We can get close to Christ, but just brush against his sacrifice. Moreover, all the medieval saints ended up being tortured: this is no coincidence. The stock market losers are also tortured by their losses.
Things look like this: we estimate the future income from this asset, obviously without knowing them, and then we deduct two elements: on the one hand, the price of “pure” time, which we call the risk-free interest rate, and, on the other hand, a risk premium, which is nothing other than the level of uncertainty associated with the future income that we want to discount. Discounting is therefore constrained by two uncertainties: the future and its level of variability. We can see that all of this is very fragile. The idea is that the risk premium can turn into a return, but no one knows when. It is for this reason that it is called risk premium: we take a risk to hope for a premium, that is to say a return. Is all this solid from a point from an intellectual point of view? Quite honestly, and although I’ve been teaching it for thirty years, I don’t know. It resembles a horoscope or haruspicine, that is to say the divinatory art of reading the entrails of a sacrificed animal to draw omens about the future. Only the Almighty, who is himself consubstantial with time, and omniscient can afford to reduce the interest rate to zero and eliminate any risk premium, since he knows the future. This leads to any financial asset measured by humans being worth less than the divine valuation, which is eminently venerable. uncertainty associated with one’s own estimation, one must, for non-maturity assets, such as stocks, reach infinity, which comes close to divinity. No one knows, in fact, when this risk premium will be transformed into a return. And, as Woody Allen said: Eternity is a long time…. Especially towards the end. This is why the financial markets are huge casino carpets on which we throw dice and then we run, we run, we run to see what will be the stabilized combination that will allow us to collect the Grail of the premium of risk, but the human being mortal, it is his successor to continue this race without respite. Until infinity…divine. Except, of course, for investment bankers who take shortcuts on this huge timeline, which led Lloyd Blankfein, then CEO of Goldman Sachs in 2009, to claim that he was doing God’s work. Nothing less, before the final judgment… But that’s not all: speculative capitalism is based on market efficiency. This last concept postulates that the prices of assets reflect all the information available about them. If the financial markets are efficient, then it is impossible to do better than the market. We understand the schizophrenic character of this concept since economic agents know that they must fight the market by their speculative acts while knowing that it is their impossible to systematically beat the performances. Men fight against a perfection and an outcome that is forbidden to them. This is of the same nature as Catholic perfection: it is impossible, since suicide is theologically forbidden, to reach the same level of purity as Christ, crucified. by men. You can get close to Christ, but just brush against his sacrifice. Moreover, all the medieval saints ended up being tortured: this is no coincidence. The stock market losers are also tortured by their losses.
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