“Why Philosophy?” is one of the most frequent questions I receive when I speak to individuals in finance or economics fields. It is a simple question, I suppose, on one level. But on another level it can be difficult to answer. This post is a collection of the common threads I see between philosophy and finance and economics. In this sense, it is an addition to my previous introduction post. There are three analogies I will make.

Philosophy Develops Critical Thinking Skills

First, philosophy develops critical thinking skills, which are essential for finance. Consider the valuation of a company. There are many considerations that one must evaluate to arrive at a fair assessment of the company’s true worth. For example, there are top-level considerations such as the management team. Are they conservative or aggressive in their approach to management? Considering the career trajectory of a CEO or CFO can indicate much of this (e.g. an investment banker turned CEO will likely be more aggressive in deal-making than an ex-Big-4 accountant). Then there are questions of the quality of assets and earnings. Does revenue come from a one-time sale of capital assets (the corporate equivalent to a “garage sale”). Or does it come from an increasing customer base? Then there are macro- and micro-economic considerations with regard to the company’s environment. Does the company have a variety of competitors or is it alone within its field? (e.g. Lyft and Uber were some of the first to the post-taxi driver service sector). Will the company be affected by global economic considerations like the US-China trade war?

But one might ask, why is philosophy - in particular - better than other fields of academic study as a mode of preparation for finance? I do not have the space here to do a comprehensive query, but I have one thought. Philosophy trains one to read authors of different viewpoints and compare the merits of each. In analytical philosophy, for example, one aims to break down the merits of each perspective into bite-sized analyses that can be critiqued on an individual basis. Take the issue of human-caused climate change for example. The analytical philosopher will consider the various viewpoints of each view. For example, a) we can save future generations from harmfully warm temperatures by providing funding to climate research, or b) we should not prioritise it as much as we should prioritise saving those who are currently alive.

One can see the similarity between philosophy and finance, then. Both require critical thinking skills. I argue that philosophy is an excellent teacher in developing these skills.

Philosophy Enables Comfort With Ambiguity

Julie Sweet, CEO of Accenture North America in a May 2019 Talks with GS episode discusses comfort with ambiguity as one of the most important aspects of working in finance:

“I often will counsel leaders that if you feel comfortable, then you probably aren’t pushing yourself enough and you’re probably not pushing the business enough either. And it’s really become a litmus test…. So thinking about it that way instead abstractly - like I need to take risks, I think it’s been a key to having people think differently and also be comfortable with, yes, there should be a little bit of a knot in the pit of your stomach, right? Or again you’re not challenging yourself.”

Being comfortable in periods of discomfort is essential to success in all areas of life, but particularly in the field of Finance. Philosophy is helpful to this end because it enables a person to develop a comfort with ambiguity. Philosophy is a complex field. At the core of its identity is the notion of disagreement. In Philosophy of Ethics, for example, there is divide between Utilitarianism (e.g. a good act is that which provides the most overall benefit) and Deontology (e.g. a good act is that which adheres to a certain moral code of ‘right’ and ‘wrong’). Knowing which one is ‘correct’ is at best, well… ambiguous. And finance, too, involves extensive risk taking.

Philosophy Enables the Comparison of Models

The third point of comparison is that philosophy allows one to become a better comparer of systems of models. Consider that different industries require different models of thinking. An example of this is the fact that different industries will trade at different price to equity multiples. This is because certain industries will be more dependent on inflationary pressures, among other reasons. For example, if the price of a barrel of oil is near its peak in a cycle, then it means that the EBITDA cannot be expected to remain as high for the inflationary period. This will drop the price to equity (PE) ratio. Meanwhile, a company that is not affected to the same inflationary pressures will (all things equal) not be subject to the same drop in PE ratio.

Philosophy develops an eye for comparing different ideas in a similar manner to comparing PE ratios amongst industries. For example, the field of meta-ethics is involves the study of different moral possibilities. One evaluates the reasons for why a) there are moral truths and humans can discover them (naturalism), b) there are moral truths as well as supernatural moral truths (nonnaturalism), error theory (there may not be moral truths), and expressivism (there are no moral truths). These are large considerations that necessitate in-depth analysis as to why each might be correct or incorrect.

Concluding Thoughts

Philosophy is just one academic field with similarities to finance. There are likely many others for which one could make similar comparisons. However, I find philosophy particularly compelling as a companion to finance. Critical thinking skills, comfort with ambiguity, and the ability to compare models are three essential aspects that can be utilised within finance. If more financiers studied philosophy it would make Earth a more contientous and efficient place.