Jane Austen Solves the Credit Crisis
The Times has the solution for the credit crisis! Before investing, ask yourself: What Would Jane Do?
Courtship is a risky business. In Sense and Sensibility, for example, Marianne invests much time and emotion in Mr Willoughby. He turns out to be a cad and Marianne avoids conjugal ruination only because Colonel Brandon is so forbearing.
Things are even worse in the non-fictional world. There are many Mr Willoughbys and few Colonel Brandons. Every year millions of lives are irreparably damaged by “love cheats”. Yet, scandalously, dating is almost wholly unregulated. What incompetence or corruption can explain the Government’s inaction?
[. . .]
Having made your choice and taken your chances, there are two ways that things can go wrong. The first is simple bad luck. If 20 per cent of men with Mr Willoughby’s known characteristics turn out to be cads, then 20 per cent of women with Marianne’s risk-reward preference will end up losers. If Marianne is among them, that is bad luck for her.
But there is no systematic error here that requires correction by regulation. If women who prefer the Mr Willoughby trade-off are properly informed about the risk premium - if they know how much risk they are taking for the sake of how much reward - then the gains to the 80 per cent who get lucky must exceed the losses to the unlucky 20 per cent.
The same goes for investing in bonds. A “junk bond” rated B-minus has a 10 per cent probability of default. In other words, one in ten will not be repaid in full. But, provided the risk premium for junk bonds (ie, the extra interest earned for taking this extra risk) is correct, the benefits derived from the other nine will exceed this loss.
We are alternately fascinated and repelled.
April 23rd, 2008 at 8:37 am
Cool article! (she said, brushing a thick layer of dust off her MBA). But what the author fails to point out in the last paragraph that you quote is that, in order to minimize risk and maximize gain, Marianne has to have a portfolio of many bonds/suitors (the author’s one in ten example). In essence, she’d have to date the whole regiment….
April 23rd, 2008 at 6:23 pm
… and we know how well dating the whole regiment worked out for Lydia …
We’ve covered Willoughby, but I wonder what the Wickham trade-off might be? Heavy investment up-front with only a facade of potential return long-term?
April 23rd, 2008 at 9:58 pm
Marianne avoids ruination because Colonel Brandon is so forbearing? I think I’d give more credit to Mrs. Allen, even though she separated them quite unconsciously.