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What They Do With Your Money: How the Financial System Fails Us and How to Fix It
A call to reboot capitalism and preserve $85 trillion in retirement savings for their owners—not for use as the financial industry’s ATM
Each year we pay billions in fees to those who run our financial system. The money comes from our bank accounts, our pensions, our borrowing, and often we aren’t told that the money has been taken. These billions may be justified if the finance industry does a good job, but as this book shows, it too often fails us. Financial institutions regularly place their business interests first, charging for advice that does nothing to improve performance, employing short-term buying strategies that are corrosive to building long-term value, and sometimes even concealing both their practices and their investment strategies from investors.
In their previous prizewinning book, The New Capitalists, the authors demonstrated how ordinary people are working together to demand accountability from even the most powerful corporations. Here they explain how a tyranny of errant expertise, naive regulation, and a misreading of economics combine to impose a huge stealth tax on our savings and our economies. More important, the trio lay out an agenda for curtailing the misalignments that allow the financial industry to profit at our expense. With our financial future at stake, this is a book that analysts, economists, policy makers, and anyone with a retirement nest egg can’t afford to ignore.
Each year we pay billions in fees to those who run our financial system. The money comes from our bank accounts, our pensions, our borrowing, and often we aren’t told that the money has been taken. These billions may be justified if the finance industry does a good job, but as this book shows, it too often fails us. Financial institutions regularly place their business interests first, charging for advice that does nothing to improve performance, employing short-term buying strategies that are corrosive to building long-term value, and sometimes even concealing both their practices and their investment strategies from investors.
In their previous prizewinning book, The New Capitalists, the authors demonstrated how ordinary people are working together to demand accountability from even the most powerful corporations. Here they explain how a tyranny of errant expertise, naive regulation, and a misreading of economics combine to impose a huge stealth tax on our savings and our economies. More important, the trio lay out an agenda for curtailing the misalignments that allow the financial industry to profit at our expense. With our financial future at stake, this is a book that analysts, economists, policy makers, and anyone with a retirement nest egg can’t afford to ignore.
296 pages, Hardcover
Published May 24, 2016
6 people are currently reading
100 people want to read
About the author
Stephen Davis
4 booksStephen Davis, Ph.D. is associate director of the Harvard Law School Programs on Corporate Governance and Institutional Investors.
See also: Stephen M. Davis
Librarians note: There is more than one author in the Goodreads database with this name.
See also: Stephen M. Davis
Librarians note: There is more than one author in the Goodreads database with this name.
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Displaying 1 - 3 of 3 reviews
September 10, 2016
An interesting review of the modern economics and its shortcomings. In case of pensions system it proposes to set up a collective fund where all the members would contribute the same amount to take into account differences in lifetime of its members. That way the overall cost would be much lower than the current approach where each individual has to pay differently according to his risk category. The authors argue for much wider transparency for the investors, legislative work that would force the financial institutions to make customer good first and foremost principle, and inclusion of the other, non-mathematical, disciplines into economics to be able to understand the true complexity of the subject.
Brief notes from the book:
The obsession with short-term results by investors, asset managers and corporate managers leads to the unintended consequences of destroying long-term value, decreasing market efficiency, reducing investment returns, and impeding efforts to strengthen corporate governance.
There are ample reasons to question whether the structure of the financial sector, featuring the innumerable intermediary agents to whom we hand our money, is fit for purpose, either to channel our savings towards productive investment or to serve as long-term owner of companies.
Financial services make up about 7% of the British economy – more than 5 times the value added by agriculture.
Perhaps the most widespread mathematical modelling system used by the finance sector is “value at risk”. It tries to predict, given how you are investing your money, how much value you lose, and with what probability over any specified time period.
The fund managers need to be the owners, not just traders of shares.
When 2008 financial crisis was rolling the Queen asked a frustrated question: “Why had no one seen it coming?”. Luis Garicano from LSE tried to respond: “At every stage someone was relying on somebody else, and everyone thought they were doing the right thing”.
We study economics to understand how we might create a more prosperous society. However, this should involve disciplines that are not readily susceptible to mathematical inquiry. This echoes the work of the sociologist Max Weber, who attributed Europe’s economic success after the renaissance to the moral values imbued by Protestantism; hard work and accumulation became legitimate moral goals. Therefore, the influence of morals, politics, technology and other institutions becomes a necessary part of the study of economics.
Even if we set aside the problem of “unknown unknowns” evidence suggests that economic phenomena are not normally distributed, because extreme events are much more likely than the Gaussian bell curve predicts. Part of the problem is that Gauss never intended his distributions to be used in economics.
Brief notes from the book:
The obsession with short-term results by investors, asset managers and corporate managers leads to the unintended consequences of destroying long-term value, decreasing market efficiency, reducing investment returns, and impeding efforts to strengthen corporate governance.
There are ample reasons to question whether the structure of the financial sector, featuring the innumerable intermediary agents to whom we hand our money, is fit for purpose, either to channel our savings towards productive investment or to serve as long-term owner of companies.
Financial services make up about 7% of the British economy – more than 5 times the value added by agriculture.
Perhaps the most widespread mathematical modelling system used by the finance sector is “value at risk”. It tries to predict, given how you are investing your money, how much value you lose, and with what probability over any specified time period.
The fund managers need to be the owners, not just traders of shares.
When 2008 financial crisis was rolling the Queen asked a frustrated question: “Why had no one seen it coming?”. Luis Garicano from LSE tried to respond: “At every stage someone was relying on somebody else, and everyone thought they were doing the right thing”.
We study economics to understand how we might create a more prosperous society. However, this should involve disciplines that are not readily susceptible to mathematical inquiry. This echoes the work of the sociologist Max Weber, who attributed Europe’s economic success after the renaissance to the moral values imbued by Protestantism; hard work and accumulation became legitimate moral goals. Therefore, the influence of morals, politics, technology and other institutions becomes a necessary part of the study of economics.
Even if we set aside the problem of “unknown unknowns” evidence suggests that economic phenomena are not normally distributed, because extreme events are much more likely than the Gaussian bell curve predicts. Part of the problem is that Gauss never intended his distributions to be used in economics.
September 12, 2022
Some interesting ideas, but strongest points weren't revealed until late in the book, at which point I almost didn't see them because I wasn't inspired to pick the book back up after setting it down. I work in the financial industry, so the topics are familiar to me but it was still a bit of a slog to get through. Maybe it's intended more for use in a b-school class and not for arm chair reading, but I didn't find the writing style engaging.
December 25, 2020
This was a great primer on the purposes, problems, and possible solutions of the financial system. The solutions seem incomplete, but I still found the book to be a great synthesis of context from historical, economic, corporate, academic and political perspectives.
Displaying 1 - 3 of 3 reviews