(Bloomberg View) — Economic forces and incentives shape not only our lives, but also our fiction – and economists rarely miss a chance to point this out. “Economics spotting” isn’t just a parlor game, however. It can help us remember why we care about economics in the first place.
In an era when finance can look like alchemy or worse, its appearance in fiction can remind us that its most fundamental ideas are elegant and essential. There’s a bonus, too: approaching finance this way has the potential to enrich finance itself.
“The Wisdom of Finance,” a new book by my Harvard Business School colleague and mentor Mihir A. Desai, traces financial ideas as they turn up in literature (as well as in music, film and theater). Desai’s panorama underscores how finance serves basic human needs – and crops up in unusual places.
Desai starts with one of the fields of finance often considered to be the driest: insurance. He writes that he’s “delighted and surprised” when his students choose to go into insurance. Why? Because insurance addresses the fundamental uncertainty of our lives – the type personified in the life of Flitcraft, a fictional real estate executive described in “The Maltese Falcon.”
Flitcraft narrowly avoids death when a falling beam crashes into a sidewalk as he walks by. This random scare sends him in search of a random existence; he changes his name to Charles Pierce and lets his life take loops and unexpected turns. By exposing himself to risk, Flitcraft becomes a human embodiment of the need for insurance. (This was intentional. Flitcraft is named after an early actuary; the mathematician and philosopher Charles Peirce was an early champion of insurance.)
Desai also uncovers finance theory in Victorian romances. In Anthony Trollope’s “Phineas Finn,” Violet Effingham thinks about option value as she maintains a diversified portfolio of suitors. Lizzy Bennett, Jane Austen’s heroine of “Pride and Prejudice,” faces a classic “optimal stopping problem,” in which she risks ending up alone after turning down her first suitor. (Spoiler alert: Bennett’s bet pays off – she ends up with the delightful Mr. Darcy.)