Why finance will never get easier to understand
One of the largest meta-analyses ever conducted into language development, headed by Steven Pinker among other scientists at Boston University, shows that our innate ability to learn multiple languages does not end as early as we think.
All of us, I am sure, know at least one person who grew up speaking more than one language. Scandinavians, for example, are often raised speaking at least two in the household - exposed to music and film - until they pick up the grammar and vocabulary effortlessly.
While language proficiency stays with us well into our teens - up until 18 according to the study - the meta-analysis also underlines that learning a second language after the age of ten will not guarantee fluency.
If this ability to absorb languages is given to us before the ages of eighteen, why do we lose it? Would it not be beneficial, in evolutionary terms, to retain our ability to absorb language?
I would say that it has not, in fact, been more useful in evolution terms to speak more than one language.
Our ability to absorb multiple languages as a child comes from the child’s need to form an attachment with those around it for protection. All of our exhibited traits have been passed down to us because at one point they were evolutionarily beneficial. Our language is no different.
If mum speaks one language and dad speaks another, well, the solution of evolution has been to simply have the best of both worlds. The same goes for children whose school speaks a different language, or if grandma speaks another, or even from the music and shows which entertain us.
One of the most famous polyglots to date, Cardinal Giuseppe Mezzofanti, who speaks an estimated 40 to 72 languages, claims there is "no theoretical limit to the number of languages one could learn." The only limitation, the polyglot claims, is time and dedication - dedication which must increase as one gets older.
However, that leaves the answered question of why we lose this ability to learn languages easily as an adult. Why would we not be better served by being able to communicate with those around us?
Imagine a hunter-gatherer society in which selection pressures increase. Food and shelter is scarce, woman die in childbirth due to unknown illnesses, and winter this year is especially bitter. Would it be better, at such a point, to be a person with split allegiances? To be a person who can communicate with multiple tribes? Who, instead of having an obvious allegiance to one sect, seems as though they could belong to numerous groups. Would this be a person that tribes would prioritise over one of their own?
Think of the different regional dialects of England, for example, or the difference between Cologne and Swiss German, or the various different accents which reverberate around South America. People in rural towns might have difficulty understanding others who live fifteen minutes away from them in the countryside.
Those groups who retained the ability to speak limitless languages, at one point or another, were pressured out of existence as resource scarcity increased. We have therefore inherited a natural state of division where we are inclined to find a sense of belonging to a particular group, to speak their language, and to mimic their behaviour and beliefs.
While languages develop once they are isolated from their language family, such as in the case of Basque or Hawaiian, language can also divide due to increased competition. The groups begin to isolate themselves as a lack of resources leads to mistrust of the outsider, therefore having the same linguistic effect as a tribe trapped on an island by rising sea levels, or jungle-dwellers surrounded by vicious vegetation.
This, I believe, is what happens when we enter the economic space.
I have always enjoyed the word ‘esoteric’ because it so perfectly describes the financial world. The word is defined by the OED as ‘for or likely to be understood by only a small number of people with a specialised knowledge or interest.’ It makes me smile whenever I hear it because the word is, in itself, esoteric.
Michael Lewis, in his infamous book Liar’s Poker, talks about being unleashed as a geek trader (geek - meaning a beginner, see what I mean?) on unsuspecting investors who would be well-versed in the market enough to trust him with millions of pounds but unable to recognise his inexperience. The clients become effective career target-practice before the trader moves on to bigger fish.
The realisation that financial sectors are only intended to be understood by a select few usually arrives at the expense of a large sum of money in exchange for that understanding. One might be confident in one sector of the market. Bonds, let’s say, or stocks. But derivatives? High-frequency trading? CRE CLOs? No thank you.
The advantage of this division lies in the fact that it is hostile towards newcomers. It keeps those away who are not here to stay, those who are not interested in learning the lingo. In order words, it excludes those of us who are unwilling to invest. The incentive lies in making the code as complex as possible, and not in providing an easy means to crack it.
This is not to say that learning about finance is impossible. The concepts are relatively simple when compared with theoretical physics, Paradise Lost, or US foreign policy in Pakistan - it only takes far more time to learn the jargon. The time barrier acts as a buffer against unwanted competition.
The solution to this problem is not simply education. If a government were to teach every child about the financial sector before the age of four, the market would contract in accessibility the more participants it received. The language itself devolves into impenetrable acronyms, creating ever more niches to make room in a clustered sector.
Take the foreign exchange market as an example, one of the most easily accessible markets for newcomers. As the market has become ever-more saturated due to internet accessibility, the foreign exchange market became abbreviated as the forex market. As the circle widened, the forex market became simply the FX market. The competition shrinks with each layer of complexity, developing new acronyms and references to exclude those less familiar with the structure, until the private party can be thrown all over again.
If I start writing about ‘equity’, and two people in one bank hear the word out of context, one structured finance employee might assume that ‘equity’ is referring to the first-loss tranche of the capital stack (perhaps of a CLO or an RMBS), while another worker involved in the stock market might think that ‘equity’ is referring to ownership of a public company. The fact that these terms exist within the same language provides no barrier to our evolutionary inclination.
Likewise, if at a financial conference attended by Americans and Europeans, the announcer starts talking about ‘CRTs’ - the Europeans might assume the acronym to mean ‘capital relief trades,’ while their US cousins might hear ‘credit risk transfers.’
Here, in the most competitive space in the world, we see the selection pressure on language play out. Instead of becoming more understandable, the language devolves to become more opaque, almost as though it is being deliberately set up to confuse.
The problem we have with making the economy more accessible and open is the problem we have of making any competitive area accessible - that it is naturally organised into a fierce meritocracy, a meritocracy which rewards obfuscation and slight-of-hand.
For decades, there have been calls to make the financial world a more diverse and accepting space. The reason this is very unlikely to happen is that any firm which opts for this approach will be out-competed, and perish. The markets show no preference for morals.
In time, we must accept that demands to make finance more understandable will not result in bankers turning in droves to CNN or the BBC in order to educate those of us who might have missed out on economy class. Idealistic notions, sadly, tend to make less money than realism. And until there is some fundamental change in our economic structure - and by extension, our evolved nature - this is the situation we find ourselves in.
