I’ve always worked in finance, starting with summer internships at investment firms in high school and culminating most recently in co-founding a new bank in the UK. Along the way, I acquired an interest in wine, perhaps to atone for the boring old banker stereotype.
Why, though, am I telling you about this glass of wine I’m drinking? Well, this glass of wine is actually mine. Not just this glass of wine, in fact, but the wine company, too. It is owned by me and a partner. It’s ours. The fine bouquet, the legs, the lingering finish: this is one of our blends.
Wine and finance. They have a lot more in common than we think—from the mercantile history that links them, to the markets, indices and derivatives that exist for both. The defining characteristic that wine and finance share, however, is the tendency for insiders, like me, to overcomplicate them. This is detrimental to those we’re intending to serve. In both cases, we’d be better off with less complexity and more simplicity.
Now, the world might be slightly more pleasant if there were broader access to uncomplicated, high-quality wine, but simplified finance could unlock a lot more. It could lead to meaningful financial upsides for large numbers of people. It could enhance society as a whole. What better time than dry January, after the holiday indulgences, for reflecting on this vino-fiscal link?
Simple, Yet Complex
Finance is straightforward: front cash to someone who needs it now and let them get you back a little later, with a kicker for your troubles. Most of finance, from credit to investments, is based on this simple concept.
Wine, too, is simple: pick some grapes, stomp on them, wait a while, consume. The process is so elementary that most of it happens independently in nature.
The complexity comes when people get involved.
In both finance and wine, we’ve found ways to layer complexity atop simplicity. This is often advantageous—creating a buzz for some—but there is often a negative knock-on—the hangover, as it were.
Credit default swaps, managed futures, structured products; residual sugar, malolactic fermentation, stabilizing agents: we humans are masters of complexity.
Finance takes simple concepts and makes them complicated. Like law, finance feels complex by design—a way of ensuring the dominance of bankers over customers. To be sure, some financial concepts are inherently complex, but much of the confusion associated with the industry is created and perpetuated unnecessarily.
In finance, we often start with one goal: sourcing the financial resources to fund a new business, for example. Investing in a company means providing it with money in exchange for a share of ownership. This isn’t, in and of itself, an overly complicated idea.
Investing, however, leads to new needs: the ability to sell an investment if you want your money back (secondary markets); tracking a company’s financial performance and calculating your share off its profits (accounting); comparing one investment with another (indices, benchmarks), and so on.
New terminology develops to describe new concepts. This becomes industry shorthand for the concepts themselves. Before long, professionals talk in “Sharpe Ratios” and “beta”, terms which are completely inaccessible to all but industry insiders. The concepts are important, but their effect can be obfuscatory.
As a teacher or an engineer or a web designer saving for retirement, you want smart people working for you who understand these concepts, but you probably don’t want to deal with them yourself. Investment companies are staffed by professionals who talk the talk, but they design and market products to customers that don’t.
As they progress through their careers, bankers and investors’ set of concepts and vocabulary become increasingly complex. As a result, it’s difficult for them to communicate effectively with, say, an interior designer saving for retirement. The resulting gap in understanding leads to confusion, frustration and occasional mis-selling.
As in finance, so in wine. Despite the fundamental simplicity of wine, producers, consumers and intermediaries have made it massively complex. Now, entire industries of exchange, collection, categorization, commentary and study revolve around wine. Wine even has its own language: often Latinate in origin and drawing heavily on French and Italian, it offers us such gems as “disgorgement”, “malic” and “vegetal”.
Seasoned winemakers, merchants and drinkers talk about primary, secondary and tertiary notes to distinguish between aromas in wine that come from, respectively, the grapes, the winemaking process and ageing. Real as these differences may be, they don’t help normal people enjoy wine. Greater appreciation by wine experts of the experience of the average consumer would help make the world of wine more widely navigable.
By picking a single standard—a set of terminology or a prescribed way of thinking—we restrict the generation of new ideas to those that look like existing ones. You calculate investment returns in terms of money. You grow Pinot Noir in Burgundy. You charge monetary interest on loans, applied as a percentage. You refer to wine by a grape or region, and you sell it in 750ml bottles.
The difference between finance and wine, though, is that finance really matters. A lot. Functional markets enable societies to support and sustain new businesses for the benefit of entrepreneurs, employees and customers. Clear, well-defined rules and regulations unlock creativity and innovation by removing uncertainty. Predictable economic performance and access to capital enable people and businesses to take risks and plan for the future.
Complexity in finance has led to an unhealthy concentration of influence, to an increasing homogeneity of thought accessible to relatively few insiders. In recent years, this has led to a systemically unstable global financial system as bankers, economists and regulators, with similar training (and corporate links), perpetuate contagious practices at an ever greater scale.
What if finance were more accessible? What if we made an active effort to simplify terminology, distill complexity and more clearly communicate hard ideas to users of finance, be they people, companies or policymakers?
Greater customer comprehension of, and comfort with, finance would in turn lead to greater demand. It would also increase the number of people confident to contribute to the development of the financial system, from local innovations to global solutions. More diversity of thought in finance would lead to a greater variety of positive outcomes.
As an example, let’s look at the concept of Gross Domestic Product (GDP). GDP, the value of goods and services a country produces, is the prevailing measure of economic productivity. GDP accounts for vehicles manufactured and legal hours billed, but it doesn’t account for parenting (creating the labor force of tomorrow) or in-family elderly care. It doesn’t consider the environmental cost of growth, including resource destruction. It doesn’t even account for some of the core objectives society optimizes for. New digital banking apps, for example, save time, reduce fees and encourage financial wellbeing, but they don’t require branches, so as they replace traditional banks, they could have a negative impact on GDP. Furthermore, in a world of increasing software-driven automation, the value of output and thus GDP could increase while jobs, incomes and quality of life for workers fall.
Regardless of whether GDP is or isn’t the right thing to measure—after all, we need some proxy for growth—it’s a great example of how a single school of thought can lead to incomplete perspective and suboptimal decision making.
Finance isn’t flawed because it’s complex: it’s complex because it’s important. However, to optimize outcomes, we must work hard to simplify complicated ideas in ways that make them accessible to more people, encouraging broader participation and diversity of thought.
We must find ways of clearly communicating complex financial ideas to customers in order to unlock access, and in doing so empower new entrepreneurs, freelancers, homeowners, savers and investors. Regulation must play a role, both in requiring simplicity of language in customer interactions and permitting useful simplification of complex concepts. Fine print is not an effective way of encouraging constructive engagement with finance.
Finance, after all, is a mechanism for allocating resources to support progress. The more effective we make it for achieving society’s goals, the better off we’ll be.
In wine, the stakes are much lower, which makes it a useful foil. In wine, prescriptive thinking is a limitation which stifles creativity, undermines broader market appeal and perpetuates “that’s just the way it’s done” thinking. Accessibility, by contrast, brings the ideas of new winemakers, merchants and customers into the fold, fostering competition, innovation and sustained relevance.
→ The most commonly used UK financial terms and ratios explained
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