Risk cannot be conquered: Has Wall Street forgotten Machiavelli’s lessons?

In chapter 25 of Machiavelli’s Prince, we see the problem of fortune and the challenge it presents to a prince.  In this instance, we are using fortune to refer to risk.  The two are not exactly the same so one cannot use this in a strict analysis of Machiavelli’s meaning.  Instead, I am going to apply Machiavelli in a less analytically robust way to make the terms interchangeable. The problem is not simply risk, as risk, but how one deals with it, respects, and understands it.

For Machiavelli, risk was closely associated with nature.  The prince’s ability to control nature is related to his ability to control fortune.

So it happens with fortune, who shows her power where valour has not prepared to resist her, and thither she turns her forces where she knows that barriers and defences have not been raised to constrain her.

Most hedge fund managers work with a belief framework that if they have not conquered risk, they have at least built the barriers and defences to constrain it.   They know that their derivatives, their algorithms, their personal brilliance and hard work will be enough to sustain their success and fortune.

In many ways, Machiavelli will be the most appealing of philosophers for hedge fund managers and investment house CEOs. His exhortations to audacity and bold action suit the worldview of partners and CEOs who make audacious risks and deals.  They are making the big plays, staking fortunes, waging a titanic struggle for profit and glory.  All the time, they are walking the tightrope between profit and loss, between winning and losing, between the market and their competitors.

In a sense, the deal, the profit, the bonus are emblematic of a youthful vigour infused in the system.  Like the youthful vigour that fuels Hollywood, in a different way, youthful ambition is the essential force within Wall Street.  The men pursuing the profits, the deals, and creating the margins, are acting with a self-belief so audacious that they cannot fail.  Like Machiavelli’s prince, they will be able to control fortune (risk) through their ambition and willingness to push the boundaries for more.

I conclude therefore that, fortune being changeful and mankind steadfast in their ways, so long as the two are in agreement men are successful, but unsuccessful when they fall out. For my part I consider that it is better to be adventurous than cautious, because fortune is a woman, and if you wish to keep her under it is necessary to beat and ill-use her; and it is seen that she allows herself to be mastered by the adventurous rather than by those who go to work more coldly. She is, therefore, always, woman-like, a lover of young men, because they are less cautious, more violent, and with more audacity command her.

They know that fortunate favours the brave.  They will take the risks, they will work harder, they will push the boundaries because such is the down payment to success in the global financial market.  All of this and more is what they pledge to control fortune.  Yet, this is the great fallacy and hidden danger within the wall street ethos.

What hedge fund managers and financial speculators forget is that fortune cannot be controlled.  They forget, at their peril and ours, that fortune is closely related to nature.  Risk, in the end, is natural phenomenon.  Man cannot tame nature.  The great delusion of modernity is that single belief that nature can be known and because it is known, it can be conquered. Instead of Machiavelli, they need to remember an earlier, classical, understanding of nature.

Horace describes the problem of risk so well naturam expellas furca, tamen usque recurret. (You may drive out Nature with a pitchfork, yet she still will hurry back.)

So what does this mean?  It means that we have to remind ourselves of nature’s power. We need to respect nature.  The financial hurricane that swept through America’s housing market was as powerful as the natural hurricane Katrina sweeping through Gulf Coast states.  When we remind ourselves of nature, we do not become timid or complacent.  Instead, it should turn us to look to perfect it and not looking for more.  Interestingly enough, nature itself produces an unstoppable abundance, and in that, our human nature shares an affinity, seeking out more. Yet, it is in constraining our natural rights, our desire for more, that we can find our humanity and connect to something more than our appetite.

In these episodes, people have a choice.  We can choose how we are to live and what we want to make.  We can consider our future guided by Machiavelli, living in an eternal tension with fortune, striving after something illusory. Alternatively, we can live with the laws of nature, and nature’s god, to find a balance within what we do, its effect on us, and its effect on others.

What choice are you going to make today?

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About lawrence serewicz

An American living and working in the UK trying to understand the American idea and explain it to others. The views in this blog are my own for better or worse.
This entry was posted in change managment, coruption, culture, management, renewal and tagged , , , , , , , , . Bookmark the permalink.

3 Responses to Risk cannot be conquered: Has Wall Street forgotten Machiavelli’s lessons?

  1. Pingback: RBS vs. Lehman Brothers failures in leadership, culture, and regulators. | Thoughts on management

  2. Sébastien Bauer says:

    Thank you for your inspiring thoughts. The comparison between the financial crisis and Fortune works well It’s been two years since you wrote this post and I’ve read it many times: it has lost none of its value. While you modestly say you explain Machiavelli in “a less analytically robust way”, in fact it’s one of the most faithful approach of Machiavelli that I’ve read from the management side. Risk is indeed a notion Machiavelli knows (the word is invented by Italian merchants in the second half of XIIIth century), and tries to think. If you complete “Fortuna” by two more concepts, which are “Occasione” (cf Capitolo Dell’Occasione, 1504:’I brush all my hair in front of my face so they don’t recognize me, and if they don’t seize me at once I’ve already passed. And the one on my heels is Remorse”) and the Virtú (what a man needs to do things right: a concept Machiavelli never define any further, for there are as many different ways of doing things rights as there are many different situations), you have the triangle in which a risk is possible, valuable and accountable.
    Please forgive my hesitating English.

    Like

    • Thank you for the kind words. I hope to expand on this piece at some point. I fear that the banks and others do not mitigate risk so much as make sure that someone else pays for it. In many cases, the risk management system has been corrupted into a system to that manages the reputation of the organisation rather than managing the risk to the client or customer, which is what would happen if the process was not corrupted. In a corrupt process, risk is managed for the benefit of the corporation and that is by default the reputation of the senior managers.

      I would like to attempt to discuss virtu at some point but in many ways, I fear that my grasp of what Machiavelli means by virtu in a variety of settings is limited. Virtu, as you point out, has to be understood by the context and the situation to which it applies to understand what it means in principle. It is not simply, a situational issue, because a man may retain virtu even if he does not exercise it on each occassion because true virtu understands when it is to be exercised, which suggests that it requires some aspect of prudence or at least phronesis, which are political skills par excellence.

      Thank you again for reading my post and providing your positive comments.

      Yours sincerely,
      L

      Like

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