BOOK REVIEW The New Financial Order – How to Manage Risk in the 21st Century

By: Robert Shiller
Publisher: Scribe Publications
Price: $39.95

Robert Shiller is professor of economics at Yale University in the United States so, even before opening the book there was fair chance that the theme and message would be academic, theoretical and futuristic. Hopefully it would be thought-provoking and relevant. He didn’t disappoint on the first three expectations, but the jury is still out on the last two. Because global banking, investment and insurance businesses have so much invested in current structures it seems unlikely they will risk changing to Shiller’s new financial order. In theory what he says has some merit, but in practice his suggestions seem highly unlikely to eventuate.
With career background of advising corporates on their financial risks, I looked forward to reading Shiller’s latest book. I had heard about, but not read, his earlier bestseller Irrational Exuberance on sharemarket investment. The title of the book was unquestionably seductive for someone like me, whose business is analysing and dealing with financial risk. But the prognosis and theories Shiller advances fell short of my expectations.
This may be harsh summation of piece of radical new thinking, but the lasting impression I took from the book was that previously cosseted American society has suddenly been awoken to the realities of risk in the real world since September 11, 2001. Americans are now seeking innovative and intriguing solutions to address these new risks to their lives.
Coping with risk – financial and otherwise – and the associated rewards is, I suspect, more ingrained in New Zealanders than in your average US citizen, at whom the book is clearly targeted. My theory is that Kiwis generally do well in understanding and packaging financial risk, trading financial markets and selling financial products for banking/investment institutions around the globe because many of them have had instructive farming upbringings.
Growing up in families whose financial well-being is inextricably dependent on livestock/commodity market prices, exchange rates, climate, timing and luck produces an acute awareness of risk and how to manage it. Managing risk involves combination of accepting some risks and off laying others in order to sleep at night. So Shiller’s research may be less appealing to readers outside the US. The fear of new and catastrophic global events adversely impacting an individual’s livelihood and financial position at some time in the future may be heightened in the US right now, but I doubt it is top-of-mind concern for directors, investors and individuals here.
Shiller’s central theory is that many of these “life-risks” of employment, asset values and financial position for an individual could be managed via new futures markets where paper contracts are exchanged in the same way financial and commodity futures operate. Shiller is impressed with the sophistication, innovation and liquidity of today’s financial and capital markets. He sees the development of similar global forward markets for “life-risks” so that an individual can manage in advance the risk of redundancy, bankruptcy and other misfortunes.
The case Shiller builds about why anyone would want to order, hedge and organise their future life in this way is weakened by the absence of the obvious counter proposal that many of us prefer the challenge of, and chance to take new risks to achieve higher financial reward. prominent local businessman investor was recently quoted as saying, “those who don’t make mistakes, don’t make decisions”. How true! Economies need entrepreneurs. Entrepreneurship is not learned at business school, it is developed in the school of ‘hard knocks’ and honed by learning from past mistakes, and being prepared to go on and take more risks. Constructing pre-determined risk profile of your life 20 to 30 years out will be hard to sell to young people intent on living the “now”.
Shiller paints word pictures to explain his theories by using long and convoluted anecdotal stories that become so complex that on several occasions I lost track of his original point.
The book may be useful text for students of finance with passion for exploring alternatives to current wisdom and convention. However for directors and managers seeking direction on managing risk in the 21st century it will not, in my opinion, deliver on its promise.

Reviewed by Roger J Kerr, director, Asia-Pacific Risk Management Limited.

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