Long, slow finance and the price of fish

Before we get onto the price of fish, let’s start with long, slow finance. Long Finance is an initiative founded in 2005 that asks “when would we know our financial system is working?” It began with a series of lectures and events around Gresham College in London, the original home of the Royal Society, in turn founded in 1597.

Long Finance has since developed a broad research programme questioning many areas of economics and finance, yet also making suggestions for inquiry and reform. The initiative has produced hundreds of publications relevant to managers, but the core themes have been distilled into our book, The Price of Fish: A New Approach To Wicked Economics And Better Decisions.

The physicist David Deutsch remembers the wonder of being told as a small child “that in ancient times it was still possible for a very learned person to know everything that was known.” He points out that a good interpretation of ‘everything’ was that the very learned person should have the right concepts, explanations and theories to understand and explain the fabric of reality.

Deutsch contends that the four key theories for understanding the universe are quantum physics, epistemology, the theory of computation and the theory of evolution. He also prompts an excellent, similar question for managers: “what should a learned person know in order to know everything that is known about business and commerce?”

On our way to a sustainable and equitable world we encounter wicked problems. Fritz Zwicky, C. West Churchman and others contributed to the development of the term ‘ wicked problems’, which was introduced in the 1970s by Horst Rittel and Melvin Webber, in a treatise for planning for ill-defined design and planning problems.

In this context ‘wicked’ means messy, circular and aggressive. These problems are not the comparatively tame problems most decision theorists study, for example chess, game theory or puzzle solving. The world really is messy, circular and aggressive. According to Laurence J Peter of The Peter Principle fame, “Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them.”

As an example of a Wicked Problem, we business-folk live in a strange world where, after millennia, we love markets yet still don’t know the price of fish:

Back in the early 1900’s, on rumours that sardines had disappeared from their traditional waters in Monterey, California, commodity traders started to bid up the price of tinned sardines; a vibrant market ensued and the price of a tin of sardines soared. A classic bubble. This fervent trading went on for some time.

One day after some successful trades a buyer chose to treat himself to an expensive snack; he actually opened a tin and ate the sardines. They tasted awful and made him feel ill, so the buyer called the seller and told him the sardines were no good. The seller said, “You don’t understand. Those are not eating sardines, they are trading sardines.” Ultimately, sardines off California were fished out by the 1950s.

Had people really known the price of fish over space and time, they wouldn’t have overfished the North Sea, the Grand Banks of Newfoundland and other fishing stocks, including Monterey’s. If we knew the correct price of fish, one-third of the world’s fisheries wouldn’t have collapsed and we wouldn’t be projecting total global fisheries collapse within the next fifty years while the seas grow increasingly acidic.

We need a set of tools, or conceptual frameworks, to help understand what is happening in the supply and demand for fish, the wider politics of fishing communities, and the even wider global market pressures on fishing industries. Economics alone is not sufficient. In fact, as with all systems, it’s wicked and evolving. There are complex interactions among fishermen, sardines and the Pacific Decadal Oscillation. We need a consilience of ideas, alongside economics, in essence theories about how the world really works, to help make better decisions about long-term value.

Long Finance been looking at a host of murky challenges. Why are some people poor; why do we have impoverishing financial crises; why can’t we recommend financial products for retirement that work; why do we fund unsustainability? So far, three themes emerge from the network of questions: fairness, trust and value.

Along the way we’ve been exploring long-term performance measurement, governance, structures and the nature of money. We’ve also published positive and specific recommendations on subjects such as discount rates, Confidence Accounting, Index Linked Carbon Bonds, Pensions Indemnity Assurance, common tenders, mortgage markets, standards markets for regulation and insured utility banking.

We also try to laugh with a spoof film, paradoxical Eternal Coins made from chocolate, and fun events, one with 350 people singing for financial reform along with Brian Eno in an insurer’s auditorium in the City of London.

With a broad research programme, asking what’s relevant about Long Finance for managers is a bit like asking what’s relevant about computers, but two examples might help.

We have an increasingly supported proposal to introduce Confidence Accounting. Confidence Accounting is a proposal by Long Finance to use distributions, rather than discrete values, where appropriate in auditing and accounting. In a world of Confidence Accounting, the end results of audits would be presentations of distributions for major entries in the profit & loss, balance sheet and cashflow statements.

Andy Haldane, Executive Director for Financial Stability, Bank of England, said, “My hope is that this proposal moves our thinking a step closer towards a set of accounting standards for major entities that put systemic stability centre stage.”

The proposed benefits of Confidence Accounting include a fairer representation of financial results, reduced footnotes, more measurable audit quality and a mitigation of mark-to-market perturbations.

A second example would be the use of ensemble averaging by many managers rather than time averaging. Ensemble averaging looks at the average return period by period. Time averaging follows each individual path. Ensemble averaging is a bit like a science fiction time travelling film where you can relive everything. Time averaging points out that you have only one life.

This is a classic mistake made in a lot of financial analysis. Interestingly, the approach to solving this, “ Irreversible Time In Economics” by Ole Peters, led to new insights on Bernoulli’s 300 year-old St Petersburg Paradox. We are now exploring how time averaging approaches might lead to a richer view of discount rates.

All said, ‘long’ is not just another four letter adjective for ‘good’. Long Finance is really about ‘appropriate’. There are some real problems achieving a long-term perspective because of our need to measure and reward performance. Current governance systems implicitly incorporate short term evaluation and frequent measurement leading to a focus on the short term. What’s the point of thinking about my long term impact if I won’t be able to hold on to the position I have today due to a short term fluctuation into under-performance? And the frequency of evaluation is accelerated by technology and media into very short term, sometimes harmful, feedback.

On the other hand, can we just say, “sure, take a long term view as a steward or agent for us and we’ll only come by every few years to see how things are getting on, and may not bother to change things even if they’re not going so well”?

We see the management issue as how to use measurement to bring the long-term into the present. Perhaps then we’ll have a useful price for fish.