A Call for Judgment

Amar Bhide

Book cover

I had high hopes for this book, which were only partially ratified. The kernel of Bhide’s argument is interesting and, to me, quite compelling. Essentially, he argues against the mathematical/quantitative/“arm’s length” trend in finance from a Hayekian perspective. A simple sketch of the argument is something like: growth in the real economy is characterized by novelty, which by its nature is impossible to capture using quantitative models. Good allocation of capital, just like good entrepreneurship, requires case-by-case judgment using local knowledge, and is not amenable to modeling. In Bhide’s view, the use of statistical models in most financial applications (aside from a few exceptions that prove the rule, such as actuarial science) is as incompatible with a healthy, dynamic economy as is central planning, for largely the same reasons.

I found this part of the argument quite interesting, although I already knew the general outlines when I started reading the book. Newer to me was Bhide’s thesis about market liquidity; essentially, that liquid financial markets as we enjoy today are major contributors to the problems mentioned above. One part I found very compelling was his use of Hirschman’s framework of “Exit, Voice, and Loyalty” to analyze market liquidity, basically arguing that the vastly increased ease of “exit” from investments has eradicated the important role of “voice” from major investors that used to be important in financial markets. An immediate corollary of this argument is that shareholder governance today is a complete sham.

All of these parts of the book were great. But unfortunately they took up a relatively small amount of the pages. Bhide spends a long time going over the history of banking and financial regulation in the United States. He also expends a lot of effort making arguments against some specific financial models, including Modigliani-Miller, Black-Scholes-Merton, and Modern Portfolio Theory/CAPM. The interesting parts of his argument about BSM have already been well-covered in MacKenzie’s “An Engine, Not A Camera”; Bhide tries to take them a step further but fails, I think, to make the case.

Worst of all, for someone with some relatively unorthodox ideas, Bhide devotes maybe 5 pages of the book to talking about his own prescriptions for reform of the financial system. He basically grabs a few ideas that are already floating around out there, including the Volcker rule, to promote. But he fails to address some major policy ideas, such as the Tobin tax, that seem to me to comport with his general approach. I would have liked to see a lot more engagement with current issues.

Two minor gripes: the book is poorly edited (we get “Volker” a number of times), and it is also written in an annoyingly “B-school” style, with lots of “Application!”-type text boxes. Just give me a unified text to read!

Ultimately I think this is essentially two or three great articles that have been diluted into an OK book.

My Goodreads rating: 3 stars