Tuesday, February 23, 2010

Of Order and Chaos

The concept, institutionalization and adherence to ‘order’ in response to a confluence of factors, events and activities might be an apt definition of how human society functions. It may perhaps be an offshoot of the complex nature of man in quenching his innate curiosity regarding his existence vis-à-vis the world around him and his pursuit to discover his ultimate purpose. These ideals, of course, might be over the top when already at the most practical and obviously indispensable level, he is concerned with the basic needs that all living creatures on Earth require to survive (and then some). Humanity, of course, is much more capable with his tools and intellectual capacity, but one must tread carefully lest he be led to believe that the concepts of anthropocentrism and naturalism are the absolute truths. I, for one, do not intend to opine on the ethereal topic of the metaphysical and if indeed there is a Divine hand in control, it would simply be too contentious to prove a point and will inevitably lead to a long and meandering attempt to define a topic so unavoidably philosophical, but in any case, when one pays attention to nature, it cannot be denied that there is a sense of order to things. Between order and chaos, there lies the commerce, conducts and sensibilities of man. As with all living creatures, people, are also just trying to get by. But, unlike the species that do not manifest self-consciousness, self-contemplation, retrospection and a higher level of intellect, homo-sapiens are somehow goal oriented. This is probably an extension of man’s innate nature to search for his purpose. Society’s systems, processes, practices, laws and institutions are the instruments by and through which he thrives on.

Regulatory frameworks and policies are extensions of man’s intentions to create order as well. In the industries of banking and insurance, risks are all around and the threat of the ‘unknowns’ disrupting the order that bankers and insurers have intended to preserve are ever present. More so are risks given special attention by insurers because unlike bankers who have threats and opportunities to hedge against and explore, respectively, insurance companies contend with business opportunities that are embedded with the threats that people want to relieve themselves of.

Frameworks and policies can be strange instruments in the commerce of man, they can be blamed for a lot of failures and misfortunes, but people also tend to cling to them because that is how systems work. They relieve the fear of the uncertain and serve as the wall to lean on; the only thing outside of them is chaos, which may probably be too overwhelming for any one person to face. As societies have advanced, the complexities of systems have progressed, undertakings (including business endeavors) have expanded beyond single localities and entered a more global stage and the objectives/purposes of people and institutions have gone beyond any one person’s aspirations/ambitions in life, the more critical these institutionalized tools of ‘order’ are to the preservation of civilization’s progress and development.

There are, however, those who argue that systems (or the system) only look to install absolute order and control on society’s populace. As society has become an amalgam of policies, frameworks, laws and systems, the more suspicious some people have become. Is free will being chastised or is there true purpose to instilling ‘order’ to a society ever vulnerable to the whims of chaos? I, at this point in time at least, believe that there is a ubiquitous struggle for balance, which defines a civilization’s existence. The extremes of the spectrum may not be conducive in allowing human society to last (i.e., absolute order on one end and absolute disorder on the other). Change is absolute and adapting to the uncertainties of society’s tomorrow is man’s challenge in responding to his unique situation as a creature capable of intellect and the utilization of tools and technology, among others. It is man's unique circumstances that it can be said that he has special motivations and means by which to respond to the adage 'survival of the fittest'. I believe that a morally motivated mechanism of the will of a people (or a species) is beneficial to its advancement. Frameworks, policies, and law and order are only as useful as the extent to which it allows the people under their dominion to grow as human beings. Then again the last two statements are definitely points of contention that many may find interesting and intriguing to expound on.

Thursday, February 11, 2010

Passion for Justice by Pompeyo Diaz (former Philippine Justice)

I wish to share a truly inspirational and thought provoking speech given by Justice Pompeyo Diaz to a graduating batch of lawyers, which my former legal studies and insurance claims professor, Atty. Rodolfo Lat, was part of.

PASSION FOR JUSTICE by Pompeyo Diaz

We are not here to celebrate the successful ending of your course in the law. We are here to send you on your way because from here, you will commence your profession in the law. We hold these commencement exercises, therefore, to say good-bye to you and to wish you well on your journey.
The closer a man approaches the sunset of his years, the more often his mind returns to the remembrance of things past. For to every man, if he lives long enough, there comes a point in life when he realizes, not without sadness, that there may no longer be time to climb new mountains. And that is when dreams begin to yield memories as if reliving the past can somehow fill the void left by the flight of dreams.
It is more than fifty years since I sat where you sit now, an acolyte at the altar of the law. But the lengthening shadows of life only make the recollection of it as fresh and clear as if it were only yesterday.
I was given the privilege of addressing you one last time. I will do so, no longer as your teacher, but as a friend. But let me take a vantage point from which I can speak with some candor. As your own sun is rising in the east, mine has long since passed the point of high noon, and in the gathering dusk, I see you within the perspective of time. There are landmarks which I have beheld but which are still hidden from you[r] view.
Some forty years ago, I took my oath of office as a Judge of the Court of First Instance for the Province of Rizal in the chambers of a Justice of the Supreme Court. This was for my first appointment to the bench. You know I had several. It was an occasion for deep pride in my family especially when the appointee was hardly thirty-five years of age and the Justice administering the oath to him happened to [b]e his own father.
After the oath-taking, my father took me in his own car and drove me to the courthouse in Pasig. He led me into the building, up the stairs to the second, and walked with me to the door of the sala which would now be mine. He stood by the door and let me enter alone. I did, and I went straight to my desk. There I saw a piece of paper upon which were written in Latin, in my father's own handwriting, those awesome words which must have shaken the walls of the Senate of ancient Rome: Let Justice be done, though the heavens fall!
In a lifetime devoted to the study of the law, these words still do not fail to stir in me emotions which should have long since been spent, memories which should have long since been put to sleep, questions which should have long since been laid aside. What is the law? What is the truth? What is justice?
What is justice? It is to render to each man what is his due. What is the truth? It is that which you seek, and keep on seeking, so that you may render to each man what is his due. What is the law? It is the instrument by which you discover that which you have been seeking so that you may render to each man what is his due.
The answers seem such simple directive for everyone to follow. The reality, however, is different. For, the law may be twisted to hide the truth in the same way that the truth may be distorted to ridicule justice. There are men in any society who are so self-serving that they try to make the law serve their selfish ends. In this group of men, the most dangerous is the man of the law who has no conscience. He has, in the arsenal of his knowledge, the very tools with which he can poison and disrupt society and bring it to an ignoble end. Against such a man, you must be fearless and indomitable, since to grant him victory is to deny yourselves to sanctity of your oath and the grandeur of your vision.
Such men I have met in my lifetime, both in the courtroom and outside it. Society's declared protection against such predators is the court of law before which all men are presume to stand equal, whether mighty or weak. The integrity of the court is the foundation upon which a just society is established.
Without this integrity, the vicissitudes of history will blow society towards the treacherous reefs of destruction and suck it into the whirlpool of oblivion.
A man of the law with a conscience, on the other hand, is the means by which a nation fashions for itself a just, orderly and civilized society, where the least of its citizens can stand proud in his human dignity, and where justice is the yardstick by which the citizen measures himself in his relationship with others and with his God.
Yet, a man of the law should have more than just a conscience. Conscience, too, can be dulled by exigencies in one's life. He may just seek a livelihood from the law. Then, no matter how financially successful he becomes, and no matter how much expertise he acquires in the law and its practice, he remains no more than a craftsman. He rises no higher than the humble plumber or mechanic from whom we expect nothing beyond an honest day's work and an honest charge for work performed, and to whom we would not dream of looking for leadership, guidance, and inspiration. He reduces law to a trade and himself to a mere huckster of legal skills.
What a man of the law should posses[s] is a passion for the truth, a passion for justice. This passion should be of such a magnitude as to give him the power to stand firm when those around him seem to be going mad. It should be of such solidity as to grant him the strength to stand along when all else is turning into dust. It should be of such perseverance as to infuse him with a loneliness that only those who have a vision can endure. It is a passion to keep alive that eternal challenge that justice must be done whatever be the cost.
You are not only men of the law. You are men of vision. Underlying all that you have learned here at the [] is the never-ending theme of passion for the truth, of passion for justice. You vision is forge[d] here, and that vision is what makes you unique among your peers. You do not know yet what life has in store for you, but never sacrifice your vision on the altar of expediency. For without this vision, you shall become hollow inside, you shall become men without souls preying on the innocence and helplessness of your fellowmen. You shall become the unscrupulous auctioneers of history whose honor is on the block, ready to go to the highest bidder.
On the other hand, if truly you remain faithful to your vision, then you are boon to society. You will gaze without favor upon your fellowmen, sifting through facts to arrive at the truth, seeking truth to render justice. The mighty and the weak shall stand naked before you, for they shall draw strength from your knowledge of the law and from your commitment to the truth. Then [and] only then, shall justice truly prevail and upon this earth will shine a piece of heaven. For, what is justice but an attribute of God Himself?
Walk firm, therefore, and walk with courage, upon [t]his path you have chosen. Let your vision guide you. The law is a noble profession, and it is professed by noble men. See to it that you earn that nobility by acting as your fellowman's shield and protector against injustice and oppression.
As future lawyers, you have your tasks cut out for you. You need have no fear that they will prove too much for you if, in taking them up, you hear always in mind that doubt is the beginning of wisdom, that humility is the grace of the wise, that compassion is the virtue of the strong and, above all, that reason is the life of the law, and that the service of justice, which is nothing more than the search for the truth, is one of man's noblest achievements.
Farewell! May you always, in your quest for a better world, walk in the shadow of Him who gave you life and honor.

(Address delivered at Commencement Exercises, March 25, 1981)

I find absolute relevance in the paper of Justice Pompeyo Dias in today's environment when he spoke of the need for a passion for justice, especially when referring to those who have been empowered by the knowledge of the law. It has been said that ignorance of the law excuses no one and I feel that one of the most tragic realities of today is the disregard by the most learned of men in promoting and upholding justice in our society. While most of the populace in our country go on with their lives without having to explore the details and intricacies of the law, some who have familiarized themselves with the legal system act to sow discord and chaos in order to conceal the truth from those who are in search of it. Whether these legal pundits and educated individuals act as accomplices to those who would break the rule of law or those who would choose to acquiesce and leave society vulnerable to corruption and perversion, those who have gained power through knowledge and yet put-off their responsibilities to the welfare and dignity of human society truly lack the passion for justice. I believe that life, if not the operations of the Universe, is an on-going struggle between order and chaos. And though my beliefs graze the ethereal, humanity as creatures created in the image and likeness of God are accountable to their existence, if not to their Creator, to instill some sense of structure and order to their civilization. As Justice Pompeyo Dias had put it, truth and justice are attributes of God. Along the lines of his speech, he recalled how his father left him a note telling him to "Let justice be done, though the heavens fall." This statement also struck me as being the outline of the philosophy that all men educated in the law should live by; that though today's Philippine society has undeniably been afflicted by corruption, apathy and unaccountability, all are enjoined to make a stand to promote justice, seek-out the truth and uphold the rule of law. And against all odds, even if one finds himself alone against the horde of the unjust, he can draw from his passion for justice the strength to seek out the truth through the law becuase the truth indeed will set us free.

On Enterprise Risk Management – A View from the Insurance Industry by Wolfgang Errath & Andreas Grunbichler

Risk is an inarguable facet of life and is further highlighted in the everyday functioning of society and the commerce of man. Insurance, as a business conceived as an economically profitable undertaking, exists to provide citizens with a means to hedge and somehow protect themselves from the uncertainties of life and the results that come with the corollary activities done through the existence of human civilization. No one can indeed foretell what the future holds, but it is always in everyone’s interest as well as desire to have that assuring sense of comfort, that tomorrow’s conditions do not deviate from the preferred. Applying this rationale to larger “organisms” of society, companies, associations, partnerships, and corporations; organizations do not necessarily shield individuals or even groups of people from risks, perils and the undeterminable conditions that they may encounter in the future. To exaggerate the idea, anything can happen to anyone or anything; barring of course those that are beyond the laws of physics or those inconceivable by common logic, reason and improbable convergence of circumstances. Enterprise Risk Management formalizes a critical organizational function that would otherwise be described as soothsaying. All the more is the concept of Enterprise Risk Management deserving of attention from insurance companies, those that expose and economically concern themselves with the variability of tomorrow. Most people would note, if not tritely, that ERM needs to be integrated to the organizational culture and of course, without any challenge, it does. In fact, is risk not already an apparent part of life? To even deny it would only result in futility. And so, it is to my understanding that all people, whether they work for an insurance or non-insurance related company, are aware of risks. There are certainly a lot of risks and perils that one (whether a person or a company) must be aware and be careful of. But if to equate this keen awareness to fear, why is it that there are still companies that go down in flames? Is the fear of the risk of bankruptcy, scandal or organizational failure not enough to serve as an innate safeguard for a business entity? We, of course, have to bear in mind that people work for varying reasons, but whether it be noble or selfish, a machine is only as efficient or effective as the parts that compose it. This is how I perceive ERM, it is an alignment of the expectations of every employee of the risks out there and the things that have to be done to keep the company functioning at the preferred conditions. In uniformity and coordination, ERM encourages the establishment of standards and parameters, whether these be quantitative or qualitative in nature. Fear of organizational failure alone does not ensure survivability, ERM channels this sense of urgency to something synchronized and concrete. In fact, innate in this concept is not passivity in recognizing the risks of the past, but a proactive call for all stakeholders of a company to keep things running at optimal conditions, just in case tomorrow becomes inhospitable.

Monday, February 8, 2010

The Paradox of Imbalance

“Because systems at equilibrium are at a minimum of G and can do no work, a cell that has reached metabolic equilibrium is dead! The fact that metabolism as a whole is never at equilibrium is one of the defining features of life.”  I can never forget the impression I was left with after reading these two statements from a Biology textbook. Perhaps the authors were deep in thought looking for a microcosm in Biology when they composed these or maybe they were just literally stating simple biological facts. In any case, however, I think that man’s commitment to developing models, systems, and predictive statistical tools is a satirical irony, if there was one, in the grander scheme of things in the Universe. A lot has been said after the financial crisis of 2008, on how the so called geniuses of Wall Street failed in doing their jobs, on how greed took the “financial system” to the edge of catastrophe, on how things could have been better if this or that was done; indeed there was a lot of blame to go around. But come to think of it, can man really attain for himself the sense of security, assurance and “perfection” that intellect and academic knowledge bring to his disposal? Is it really about the ends or is it about the means? Is the finish line the ultimate goal or is the struggle (in life) the only thing that actually matters? Models were instituted for their ability to dictate some degree of order in a system, but I doubt that these would provide the ultimate solutions to all the problems out there, because tomorrow is always uncertain. According to Murphy’s Law, “Anything that can go wrong will go wrong.” To discount even the minutest probability of occurrence of an undesirable event is a paradox within the context and practice of risk management. Who would need risk management if there was no risk to worry about at all? We can never discount the fact that among normally distributed frequencies there are anomalous events, skewed Gaussian bell curves and tail events that no definite confidence interval would cover and take into account. Uncertainty is risk, and models might mitigate the impact of undesirable events and conditions, but their counteractive effects are not equivalent to a precise tactical nuclear strike. Different problems have different symptoms. Models and systems might perform well above expectations and completely stop any crippling damage to a system or institution, but at the other end of the spectrum, they can definitely fall short as well. Man is destined to be humbled by the finiteness of his physical existence. That is why, I believe, that risk management is a continuing process, more so am I convinced that the Insurance industry is as relevant and critical as the type of civilization a society builds for its benefit. No, there is no ultimate weapon, no all-encompassing model that solves all the riddles of life, but even if there is no absolute shield to protect one against all the effects and manifestations of risk, man’s will to move forward (if not otherwise derived from his instinctual need to survive) and to create a better form (or model) of protection is already an assurance that once a model or system fails, a new and improved one will be there to replace it.

Sunday, February 7, 2010

Finance - Banking and Insurance

The world of finance has indeed become a more integrated sector to work in these past two decades. Somehow, in my trail of thought and philosophical musings, I found it both enlightening and alarming to realize how the economic beliefs of capitalism have gradually become the dominant force through the aid of technology and advanced communications infrastructures. Just a few decades back, at a tense stage of human civilization, the competing philosophies of Marxist USSR and the capitalist’s democracy of the United States polarized the world as the Cold War dragged-on through their proxy wars and socio-political suppositions. After the fall of the Soviet bloc, it was open skies for capitalism to thrive in, more so with China becoming more attuned to what the West has been encouraging the whole world to put in place – an integrated economic system that ran on the philosophy of free markets. I am not one to completely side with any of the poles that either claimed that risk-taking should have been regulated or that, barring corruption and dishonesty, the laws of supply and demand should have aided the market’s dynamics (in correcting itself) because in any case, most nations have already dipped their toes in the pool. There are now only a few states that run on the Marxist philosophy, Cuba, Vietnam and North Korea just to name a few. In any case, however, the point of all this is whether there was indeed a flaw in the capitalist system, we have yet to find a more conducive means by which to efficiently distribute and allocate the limited amount of resources in the world to so many (humans) who want to have as much of it (this is, after all, what Economics is). Most anti-capitalist movements (especially by those linked to Islamic terrorism and the “have-nots” in the system) have committed themselves to destroying this system, while those (“the haves”) have dedicated themselves to protecting the order that the system stands for. For the conspiracy theorists that have held a belief that behind the scenes there are a few powerful individuals or institutions that could sway the market according to their whim, I do not completely doubt or ridicule them, but neither do I give them full credence, because somewhere in the churning of this economic system, I believe, there works the ‘invisible hand’ that influences the dynamics of supply and demand. This dynamism of the market, that as if it has a life of its own, is the collective consciousness of people and trained professionals who understand how the system works, which by-and-by gives the corrective nature of bids and asks, spreads and volumes, the supply side and the demand side of all assets imaginably for sale or ready to be bought.
Within this economic system is a microcosm of life. Perhaps, seeming to be highly sophisticated to the uninitiated, if one looks close enough, it is simply a summary of choices in an organized system where one has to steer towards returns (good luck/profits) and away from risks (bad luck/losses). Unfortunately, however, the insurance industry, seeking to push innovation to the limits, saw traded assets in financial and capital markets as items that were embedded with insurable interests and undeniably they were! There was no arguing that as far as event risks are talked about, financial instruments were something that people could be worried about, too, and so therefore were insurable, and compensable in case of contingent losses, for the right price. Amid this line of thinking, however, in my opinion, what the insurance industry overlooked was its exposure to a little financial concept called leverage. Whereas, insurance institutions usually deal with real and tangible capital assets and equity, banking institutions were very much acquainted with the concepts of leverage/credit/debt/(OPM) other people’s money. While insurers dealt with the probability of events, banks dealt with foreclosures, total losses and an integrated economic and financial system that has time and again exhibited a domino-effect through previous economic recessions. When something awry happens in a sector or portion of a country’s economy (especially that of the US, which is singly the most powerful and influential country in the world), most if not everything in the economy follows. It is not hard to illustrate such a scenario, especially when economic fundamentals tell us that more expenses beget more income; again, it is the churning of the system that promotes the cycle (or the “struggle” if you will) to keep everyone busy and oriented at developing industries that promote better living standards, better products and services, longer human life-spans, advancement in science and space exploration and other “productive” or worthwhile activities that are far better than living a sloth’s life. This is an economic system that facilitates and encourages humanity to push itself to the limits for the future benefit of the species because we are after all self-consciously capable of leaving a legacy for future generations to treasure.
Before drifting further from the discussion, the business of insurance indeed provides a service in the form of compensable security against events that bring about losses. Banks and other financial institutions, on the other hand, concern themselves with the returns on their products, even the most basic banking product, which is the savings deposit, cannot hide what banking firms operate for, which are returns. Depositors and investors are compensated with interest rate returns and capital gains. Barring concerns on the dilutive effects of inflation to the value of one’s money, is there any other reason to lend one’s money to a bank, versus perhaps just keeping one’s stash under the mattress? This, of course, may as well be a rhetorical question. There is still a distinction between insurers and bankers and I would like to think that insurance is a bit more noble, especially for those who have elected to give themselves peace of mind against the uncertainties of tomorrow.

Saturday, February 6, 2010

Thoughts on Corporate Governance and Financial Crisis by Kabigting - Earl Malvar

Encompassing regulatory policies conferred to industries and individual companies set limits on how businesses and going concerns can be conducted. Interestingly enough, it is an implied direction for an organization to ‘push’ its resources to the limits in order to maximize investor returns and value. Without external monitoring and policing from appropriate authorities, unbridled or irresponsible conduct in the pursuit of organizational goals can lead to undesirable consequences, catastrophic in fact to the public realm if the industry/company is critically integrated and hugely involved in the direction of an economy/society. With the pace of globalization, economies are becoming increasingly integrated and interdependent on one another that an economy’s crisis is sure to hit the others in one way or another. In my opinion, corporate governance may be interpreted as a delicate cross between the essence of legalities and justice and of moral conduct and corporate responsibility. Corporate governance is the internal conscience that gives character and integrity to otherwise hollow organizations formed and known as corporations under the operations of the law. If laws and regulation passed down by those empowered in public service give the clear delineation between what is allowable and illegal, corporate governance heeds the call for self-restraint and caution in the conduct of business and commerce. It is my impression that corporate governance cannot be successfully executed without the clear comprehension, empathy, coordination and the synthesized undertaking of all stakeholders in a company. It is a case of the chain being only as strong as its weakest link. In any case, the extent of effectiveness and sense of security that corporate governance provides is only as good as what internal policies and subsequent results in profitability and growth purport it to be. In a sense, it could be said that the saying “if the wheel isn’t broken, then don’t fix it,” vastly applies in how companies are run. Retrospection and the instilling of internal rules become most apparent when the damage has already been done. Proactive revisions and ‘nurturing’ of corporate governance may be the next step towards developing management foresight and innovation.

Thoughts on Agency and Corporate Investment The Role of Executive Compensation and Corporate Governance by Kang, Kumar, Lee - Earl Malvar

Involving top executives in the performance of their own organizations by giving them stakes of interest is an intuitive way of ensuring that owner-management diversity does not put the company’s future at odds with the self-interests of those who would have a direct hand in its operations. Issues on agency, especially when owners entrust their capital investments in going concerns, have been somehow mitigated by the very nature and capital structure of a business entity in the form of a corporation. By ‘sharing in the fate’ of an organization, owners are assured that top management would treat the company they handle as if it were their own. It is exactly the same logic when investors buy stocks in equity markets, since shares represent partial ownership in a company that they would have otherwise been unable to establish or reap the benefits from on their own. Large firms that belong to complex industries only highlight the fact that no mere individual can establish a going concern like them without collaboration and synthesis of different specialties and talents. In the case of public companies, authorities are able to monitor or at least infer the performance and prospects of a company through internal management-related stock buy-ins or sell-offs. Owners of privately-held corporations also benefit from equity-based compensation as they allow the careers/livelihood of ‘unrelated individuals’ who they employ as the leaders of their organizations to be integrated into the ‘life’ of their respective companies.

Thoughts on Risking the Enterprise by Cavanaugh - Earl Malvar

Enterprise Risk Management, if to prove successful for an organization’s sake, must encompass and permeate through a company’s culture. As what was mentioned in the article, the big Wall Street names that tanked amid the mounting pressure during the financial crisis were not short of documentation and conceptual design on risk management systems, but they were lacking in execution. Risk management, especially in the insurance industry, can be tricky because risk factors can sometimes be unquantifiable. The very nature of risk as an unanticipated loss or liability further highlights the need for a firm’s workforce to understand and practice ERM. Risk management, though a relatively new function in organizations, has now been given greater attention by higher management after the debacle of 2008. It may still have a long way to go though before uniformity and formalities are established as different industries and companies possess unique attributes and business needs that make effective Enterprise Risk Management elusive to practitioners.

Thoughts on Corporate Income Taxes and the Cost of Capital A Correction by F Modigliani & Merton Miller - Earl Malvar

In exploring the dynamics of leverage, taxation and ultimately the realized after-tax returns that a company reaps, the authors were quick to point-out that although it may seemingly be attractive to maximize the debt-issuance capacity of a firm, there are many real world circumstances to consider in formulating a capital structure policy. I am in agreement that beyond debt issuance as a predominant criterion to determining the cost of capital, a firm must assess its situation in its business environment. As noted in the article, limitations are imposed by creditors when issuing debt and that over-leveraging can sometimes put a company in a precarious position. Indeed, leverage can be a two-edged sword. It allows a firm to accelerate its business development and thereby its earnings potential, but it also exposes itself to over-commitment of cashflows to creditors who may stop at nothing to force bankruptcy in the event of a default. Furthermore, it was noted that an investment is never 100% debt-financed, in so much as opportunities to pay down debt or to issue equity to investors arise through the course of a business venture. I think this highlights the cyclical nature of markets when interest rates rise and fall, thereby allowing finance professionals of companies to adjust accordingly to varying economic scenarios. Taxes are already an unavoidable given to a going-concern, the tax perks realized by leveraging-up provides a firm an advanced foothold on capital-budget plans and may even boost returns, but care must be given in positioning one’s self when dealing with debt.

Thoughts on Linking Corporate Strategy to Capital Structure Diversification Strategy, Type and Source of Financing by Kochhar and Hitt - Earl Malvar

As the authors Kochhar and Hitt have set-out in exploring the relationship of corporate strategy and capital structure, they have conjectured intuitively and proven empirically that there is indeed an interdependent relationship between the two. It is only but rational for borrowers and lenders to close deals only when both sides find it mutually beneficial to do so. Information is powerful in this day and age. In an integrated global market, borrowers and lenders are given so many funding and investment alternatives. Asymmetric information was named a key determinant in investment strategy for both borrowers and lenders. Firms can easily involve themselves in emerging opportunities only when they have the funds/liquidity to do so. As I see it, firms in the practice of involving other people’s money (through debt or equity issuance) are indispensable agents of an active financial system. They serve as facilitators in developing risk and return expectations for the market to evaluate. They allow deserving industries to thrive and the unworthy to fold; short of saying that they keep the spirit of entrepreneurship alive and the gears of innovation constantly turning. As any sound investor would have it, however, involvement is a matter of evaluating the risk in exposing one’s funds. The borrowing company, for its part, can only take what the market is willing to give and it is through this situation that capital structures and corporate strategies become intertwined. I think the article’s conclusion that related diversification is preferably funded by equity financing indicates how an investor/lender can recognize his limits in knowing how a company with proprietary systems, products and other intangible assets operates and would rather invest with the thought that he will only have to look at the bottomline of financial statements and the capital gains and dividend yields he may eventually reap). On the other hand, it was said that debt financing is preferred for unrelated diversification. Following the article’s line of thinking on asymmetric knowledge, an investor may find it more comforting to know that venturing in a new business means both he and the company will have to explore the quirks of the business together with no threat of malicious concealment of facts. As the authors have concluded (albeit finding reason for further studies due to some conflicting test results from Chatterjee and Singh), there is reciprocity between financial strategy and the nature of diversification/expansion that a firm pursues. Further, in interpreting the conclusions of the article, mergers and acquisitions done for related businesses were funded via public funding. This highlights even by simple intuition how available information on the would-be-bought firm reduces the need to justify to the public the company’s decisions and even puts the acquiring company in a better bargaining position simply because it has already been exposed to the same business. As for diversifying to unrelated businesses, direct entry funded by private money may also find good justification in the reasoning that an uninitiated firm entering into a new business venture would find it difficult to value an existing firm in an unrelated business. In fact, it may even be more prudent, though certainly more demanding of work, to build this unrelated business from the ground-up with private money – from investment savvy people who are willing to take the venture and the risk with the company. In summary, it is critical for a firm to know how it will fund its plans so it can minimize effort and costs.

Thoughts on Efficient Capital Markets A Review of Theory and Empirical Work by Eugene Fama - Earl Malvar

Based on Fama’s empirically-based findings, I believe that markets operate under an efficient market model. Although detractors may find exceptions through which to challenge the efficient market hypothesis, I think the points of contention arise more from the arguments of semantics and of how “all available information” is interpreted. Indeed, if it can be argued that some prominent investors have “success stories” to share, then this goes against how the market functions in “fully reflecting” the information that matter. Moreover, in recognizing the efficient market hypothesis, it is basically saying that active portfolio management becomes irrelevant. However, I think that information only matters to a price if it matters to those who concern themselves (people) with it. Price action in markets becomes the reality only if the valued information reaches the judgment of those who need to receive it. Big money may influence a price, but it does so because it keeps itself within the “area of awareness” for data or facts that may bring about price movements. A new investor looking at a stock, would initially be unengaged to the factors that matter for a certain stock’s price and may even nonchalantly put money on a stock simply because it is the market’s consensus price, but eventually he will become acquainted to the facts that matter. It may be something as philosophical as asking the question “Does a tree make a sound, if it falls in the forest and there’s no one around?” My sense is deviations of stock or portfolio performance is more about market timing based on insights. The market still reflects all available information, but those in the right position at the right time would eventually benefit from what the market does. Now, whether or not outcomes are due to pure luck or investor skill and astuteness may be difficult to say. Money influences money in financial markets and even if empirical studies have shown that big institutions cannot categorically do better in the market, they have more funds to sustain bids and offers than smaller market players who would otherwise be tapped-out. Anticipated information, data and facts indeed are ultimately priced in by market players. Whether or not only a few have a monopoly on very influential information is moot or even trivial in my opinion because eventually these facts will come out, they have to come out, in the open for all the market to evaluate, otherwise the existence of this price-moving factor would contradict itself. If a stock is illiquid and only two parties determine its market price through their bids and offers, then these two parties would basically be the market for this stock. Any exclusive information (that could push the price of a stock) possessed by one party can only be rendered valuable if the second party concurs. Ultimately, capital gains on the stock or bigger dividend payouts can only be benefited upon when the fact is reinforced by the stock’s company itself (also implying that facts have become public knowledge). Expanding this thought to a very dense capital market, however, brings-in so many factors into consideration, not to mention the practice of speculation, that it becomes inevitable for the few market players with good investment insight to be swept by the market belief or consensus. I think, however, that these insightful investors benefit from their unique market outlook or knowledge by positioning themselves better (whether in terms of timing or in amount invested) before the market catches up to the reality of it all. Whether it be called luck or wisdom, it may eventually be given judgment by the markets through time.

Thoughts on Arbitrage Pricing Theory by Roll and Ross - Earl Malvar

As an alternative pricing model to the CAPM, I think the Arbitrage Pricing Theory works on a very plausible framework that attempts to identify and understand the factors that influence movements in asset prices. For one, formulating an approach wherein determinants are segregated as systematic or idiosyncratic factors helps investors visualize where the theory is going. Supported by empirical tests, the four systematic factors that were identified by Ross and Rolls strengthens its case over the CAPM as a pricing model that is sensible and realistic. I also think that the model intuitively recognizes the price-auctioning fundamentals that the market functions and exists by; wherein buyers and sellers make bids and offers based on perceptions and expectations. Furthermore, it highlights how the market, as if like a self-regulating entity, attempts to price-in all material information to identify undervalued and overvalued assets in order to make the “best deal”. I think what makes the APT special, more than anything, is the flexibility it offers in valuing securities, whereas the CAPM requires one to identify an efficient market portfolio based on maximizing utility via returns and risk, this model moves beyond the “revered” model portfolio and promotes the identification of factors that influence price movements. This, in my opinion, further expands the practice of asset valuation and forecasting through statistical processes such as correlation, regression, etc. Although it does not suggest absolute predictability of future prices, I believe it recognizes the role that humans play in creating market consensus and perceived price parity. After all, what is price but an agreed upon value by people based on current market and economic conditions. What I found interesting about the APT, however, is its recognition of risk-taking in a different light. Although the CAPM also gives regard to risk, it does so with the premise that investors look to minimize it. With the APT, risk is reflected as the surprise factor or the alpha that investors price-in or pay for; that although a certain security (or stock) may already be at parity to the anticipated value, unknown future events can be and are speculated upon and are even reflected through the sentiment of risk-takers via the presence of bids and offers in the market. It also suggests that although an investor can opt to make money passively by buying the market (diversifying away idiosyncratic or company-unique risks), well diversified portfolios can still perform variedly and innumerable factors will ultimately influence price. Taking equity markets as an example, if stock prices in the market can move by the seconds and minutes, does it really mean that a company’s value and business prospects can change that fast? And if information plays a part in stock prices, how fast does a newsroom, a reporter, a news editor or even a rumormonger have to work to disseminate facts, half-truths or even lies to influence prices? Encompassing these questions, in any case, I think that the “anticipated” figures are still relative. Though market players can price-in all available information, I believe that an outlook is still opaque amongst investors and never entirely consensual. Sometimes, the direction of a company’s stock (whether up or down) can be predicted on (even by those not entirely exposed to the teachings of finance), but the numbers used by analysts will vary and even conflict each other.

Thoughts on The Capital Asset Pricing Model Theory and Evidence - Earl Malvar

 The authors, Fama and French, are justified in cautioning students of finance to take the Sharpe-Lintner Capital Asset Pricing Model with a grain of salt. As any scientific endeavor would have it, even in the field of finance, empirical evidence and testing are critical in developing theories and fundamentals. Innovatively developed pricing models if simply based on previously faulty premises and models are clearly not sound and acceptable. The basics must first be set straight before the trail of thought can move forward. Though the CAPM provides an intuitive framework on which assets and securities can be valued, experiments and research have continually suggested that the CAPM and its assumptions are incomplete if not flawed. For one, defining a comprehensive and efficient market portfolio as a given is already a critical challenge to contend with because it is against which other variables will lean on. Furthermore, if indeed Markowitz highlights the importance of how the interrelationships of individual securities play on the risk-return profile of a portfolio, while past statistical data may be limited in revealing the probability of future price movements of various assets, then a certain set of securities may not necessarily be the much coveted proxy to the true efficient market portfolio. The elusiveness in pricing assets, especially those of interest to the investments community, is possibly due to the innumerable factors to consider. Although the human factor, aside from other overlooked or hard-to-quantify factors, may be “priced-in” on historical data that the CAPM and its other offshoots can take into account, these intangible factors serve as “wildcards” when looking at future fundamentals and price action. Perhaps an acceptable illustration would be in trading stocks, though some believe that technical analysis is more of an art than a science, practitioners have shown (though not always) that price charts of assets can approximate human behavior and psychology (among other things) in securities trading, without necessarily relying on measured or quantified data other than the price. Price action in itself is enough to encompass all data that matter. Dissecting the factors that influence the price movement, however, is not an activity that a technical analyst would spend his time on. A holy grail in valuing assets is still up for discovery and exploration, if indeed attainable.

Thoughts on Portfolio Selection - Earl Malvar

 Portfolio diversification is indeed an indispensable component in investment and portfolio management. As common sense would have it, investing entails maximizing return and minimizing risk and here lies the theory that there exists a desirable set of portfolios or efficient frontier that follows the E-V Maxim, as described by Harry Markowitz. Although the author attempts to make a demarcation between the activities of investing and speculating, I am prompted to believe that both are synonymous in essence. Mr. Markowitz’s intent to explain may have been lost in translation or in the evolution of the word “speculate” through the years, but I feel that his theory should instead be referred to as a delineation between investing and gambling. In this article, he was explicit about focusing on investor behavior in portfolio selection and had yet to explore his “first stage”: the formation of the relevant beliefs on the basis of observation. His second stage on portfolio selection is anchored on the expectations of securities performance. He offered some suggestions on how the values of expected returns and risk could be obtained via statistical methods. And here lies a microcosm, in my opinion, of the “human struggle” in the field of financial investments. I think that predicting the future or simply the next day’s outcome is always anybody’s best guess. It will always be an unknown and statistical tools can only reveal so much. I do agree with his belief that statistics should be combined with the judgment of practical men. Statistics and its various methodologies allow the assembly of models based on variable relationships, probability, mean regression and other assumptions that give investors a degree of confidence in decision making. The fact that the field of finance is populated by trained, experienced and like-minded professionals who are educated in the ways of the commerce of man brings about a sort of structure/order that may influence market logic, expectations and reactions. The regard of investors in the dynamism of the market is but a reflection of how professionals in the field of finance attempt to predict or derive a truth of a probable future. Despite the uncertainty in the future performance of a portfolio, the very practice of diversification, in all its intent and rationale, points to the objective of reducing the risk of loss, while aiming to enhance the original investment. Mr. Markowitz’s E-V hypothesis in itself presents a logical rule on investing in an optimal portfolio. Taking into regard interrelationships among securities, as reflected by correlation and covariance, highlights the value of diversification by “not putting one’s precious eggs in one carton box.” Diversification ensures that exposure to risk is kept to a minimum, especially when taking into account how a portfolio’s contents interact amongst themselves. The E-V Maxim, however, only shows the “best” set of securities to put money on, but is unable to highlight the varying degrees of investor risk tolerance. The most desirable portfolio may not necessarily depend on quantified risk and return because these are but suggestive and assumed numbers to a unique-minded investor.

Thoughts on Portfolio Selection - A 50 Year Retrospective - Earl Malvar

Harry Markowitz can indeed be considered the father of modern portfolio theory on account that he introduced mathematical formalization in investment diversification. Critical to the emergence and development of modern financial economics was his highlighting of the two key factors in investing and portfolio management - expected returns and quantified risk - that brought about his own theory on diversification. Markowitz was able to integrate mathematical proofing and human behavior to develop his practical theories in investments. Although his work was paved by academicians, financial and economic philosophers ahead of him, he was the one to synthesize the theories and principles into something practicable and (almost) tangible to the investment profession. Diversification, with the intent of identifying the set of efficient portfolios, established the principle by which all investors have recognized until today. Based on his subsequent works, Markowitz theories can be characterized as malleable as he offered suggestions to his contemporaries on the theories that may be further explored and developed.

Thoughts on Nobel Laureates Trace How the Economy Began to Fall Apart - Earl Malvar

I agree with Paul Samuelson’s belief that there is a need to return to financial moderation through regulation. Advocates of the Free Markets philosophy, I think, have a plausible point in saying that markets will ultimately regulate themselves, but human greed can sometimes get out of hand and lead to irresponsibility and unaccountability. Moreover, it is alarming how accelerated innovations in financial markets could become extremely destructive and almost likened to a speeding car crashing into a brick wall if left unchecked. Necessity paves the way to development and evolution and if it could be considered fairly applicable, Charles Darwin’s Theory of Evolution is true to applied finance as well. The weak financial products and tools do not survive, and those that become integrated and vital to the market and the economy flourish. Robert Merton had a good point on the need for risk-taking. It may be true that unbridled greed had a major part in the crisis, but in hindsight and barring malicious activities, market players engaged the situation based on the rules, limits and restraints that sculpted the functions and framework of the US economy. It was in accordance to what regulators, authorities and in fact all stakeholders thought fit and acceptable. It would only be natural for stakeholders big and small to operate and thrive on the given conditions. And though the trough was as deep as it got, I think it is how markets develop, mature and evolve. Prosperity will always have an antithesis to it, if not based on the fundamental laws of nature. In fact, if none of the mess occurred, all activities prior to the crisis may as well have continued on without any question. The eventual bursting of the real estate bubble and the flaw in the valuation of structured products, however, highlights how a system so critical to civilization can be sensitive and fragile to neglect. This was how home prices, on which so many mortgage-backed securities were valued on, were bloated; the market speculated that prices would always be on an uptrend and that there was real demand. Risk in itself, however, is an absolute reality in finance, in fact it is a natural part of life, and so in the pursuit of investment and wealth management, it is inevitable to encounter it in varying degrees. Derivatives reassign risk to those who can bear it, but risk on massive amounts of money can be destructive. Leverage in a functioning economy accelerates innovation and development, especially if the debt taken on is by a legitimate going concern – a business that may be involved in engineering, pharmaceuticals, health care and other critical institutions of society. In my opinion, leveraged positions in the field of finance, especially if tantamount to binary or two-way betting can sometimes distort the activity of risk-taking. A bank lending to a borrower in need of tangible goods/services to me is an acceptable function of the banking sector because the financial system is based on redistributing funds from those who can afford to lend it to those who are in need of it. Leveraging money on money, however, especially in speculative activities can be harmful if not kept under regulation.

An Abstract on the Costing of Life Insurance

In view of the life insurance industry’s circumstances and the tight competition among industry players, the proponents were unable to obtain a detailed breakdown of the costing methodology from Ayala Life’s Actuary Unit. In any case, however, it is still possible to analyze the principles of costing in a life insurance company by reviewing the nature of its operations and implementing a generic approach applicable to any going-concern aimed at generating a profit.
THE PRODUCT AND REVENUE GENERATION
Traditional life insurance products are unique simply on the business premise that human life is unquantifiable. Therefore, life insurance plans are usually constructed with a monetary sum amount in mind at the end of a pre-specified period or duration. As most insurance companies would practice, pooled premiums under a classified type of business risk are considered a risk portfolio; separate and distinct from other lines. These risks are equivalent to SKU’s (Stock Keeping Units) in retailing, although quite different in form since insurance policies are not always homogeneous as standardized products/output of manufacturing are.
In practice, there are various ways to refer to an insurance SKU – that is an insurance policy. Policies can be taken per piece as each is attributed to a unique assured with unique conditions, circumstances and other givens. Policies can also be treated as portfolios under a certain classification or line of insurable risk. Policies can also be referred to in terms of amount, type of insurable interest, degree of risk, probability of loss, the location of the risk insured, among other ways of organizing the pools of risks that an insurance company has agreed to take-on on and thereby hedging the insured.
As already mentioned, life insurance policies are issued for a predetermined sum of money once the insured dies. Computation for premiums varies from product to product, though in general, regular life policy premiums are based on a mortality table. Upon application, an underwriter evaluates the total mortality risk represented by a proposed insured, and assigns positive or negative values to each risk factor that may impact a person's mortality risk. This very process already subjects the assured to scrutiny, as his health and lifestyle, among other highlighted factors, provide a somewhat objective scale by which the life insurance company can assess the probability of death prior to the mean mortality age of a locality's populace.  The proposed insured is then placed in a risk class (preferred, standard, substandard, or declined) and his premium rates are computed accordingly.
Unlike the objects of coverage of non-life insurance products, more specifically property, life insurance products do not have a benchmark by which forum-shopping assureds would refer to; again, simply because human life is priceless. It is this very nature of a life insurance policy’s object of coverage that the proponents’ are led to opine that potential life insurance clients do not possess as much bargaining power as non-life insurance clients do. Life insurance clientele are usually presented with rates based on the life insurance sector’s prevailing rates, which are contrarily pliable in the non-life sector. 
Legally, for purposes of elaboration, under Title 7 (Rating Organization and Rate Making) Section 356 of the Insurance Code of the Philippines the law states that,

 “No member or subscriber of a rating organization, and no insurance company doing business in the Philippines, or agent, employee or other representative of such company, and no insurance broker shall charge or demand a rate or receive a premium which deviate from the rates, rating plans, classifications, schedules, rules and standards, made and last filed by a rating organization or by or on behalf of the insurance company, or shall issue or make any policy or contract involving violation of such rate filings.”
The proponents are encouraging the readers to take the assertion, on the non-life insurance sector’s practices in adhering to prescribed premium rates, at face value, since further exploration on this issue would be moot and a more thorough study would be more relevant for another topic. In any case, though, the proponents are predisposed to believe that rates are also tweaked in the life insurance sector, but perhaps at realistic degrees of haggling, as any competitive industry would experience. Returning to the flow of discussion, the non-life insurance sector does not have as much luxury in enforcing rates in a competitive market due to the existence of referable market values of insurable properties. Costing and the quantification of value, as such practiced in the profession of accounting, are achievable when dealing with objects/property.
COSTING
Proceeding further with the discussion on costing, the proponents wish to again highlight the luxury by which rates are quoted by life insurance companies when determining the premiums due from an assured. Perhaps there exists a point where an assured is disconnected from assessing the accuracy of a human life’s value (i.e., on what he/she must pay for the sum in contention). A good way to illustrate the case is when a premium is quoted for the risk of loss of a car (which normally has a fair market value – a price that another would pay for the object), while another quote is made for the loss of human life. Again, the distinction is absolutely apparent.
Pricing usually has two parts: 1) the cost of benefit (which is the insurance or mortality charge) and 2) the loading charges, which takes care of commissions, taxes, operating expenses, etc.
With this concept in mind, the proponents can now point-out that costs can easily be covered as long as overhead expenses and mortality frequencies are covered (with the risk portfolio not hitting the asymptotic tail events, i.e. more deaths in a given time interval than expected). To elaborate this further, actuarial calculations in determining the rates to charge the life of the assured usually have a profit factor. Therefore, as long as the assumed probabilities in the mortality levels of the market manifest at the desired degree of confidence, then it is unlikely that losses would be attributable to deaths and more likely so to operating expenses. The proponents wish to emphasize that even if premium rates are derived from statistics, profit is already intrinsic when quoting a price to the assured. At this point of the discussion, it can already be deduced that life insurance is indeed a very profitable business, with the risk of loss or ruin only likely to occur at the tail ends of a normally distributed bell curve.
Another factor to a premium’s pricing is the loading charges. Loading charges are usually factored in when calculating the premium chargeable to the insured in the insurance industry, which is also priced in the non-life insurance sector, although again waivable if the tightness of competition warrants it. Interestingly, loading charges were designed to answer for all other miscellaneous charges outside of the mortality risk (i.e., the amount payable when all deaths have been added).
Although it would simply be hard to imagine that a single life policy sold could produce enough funds to answer for both the risk of death and other attributable expenses in the operation of an insurance business, it can be deduced that a life insurance company can easily project a hurdle amount for a given financial interval. This simply means that a life insurer intends to sell as much insurance policies as it can, knowing that its cost of benefit factor in the premium kicks in upon the application of the law of large numbers and that corollary to it are the loading charges factor in the premium that should answer for all other expenses to be incurred.
For purposes of discussion, a life insurer does not only have to contend with the technical aspect (i.e., underwriting and claims management) of its business, but also the financial aspect (i.e., investments). Therefore, other costs, albeit indirectly attributable, are opportunity costs and the effect of inflation, which affects the real rate of return in investments. Without delving too much on the intricacies of capital markets, the benchmark policy rate of the Bangko Sentral ng Pilipinas (BSP), which is the most basic of rates in pricing overnight lending, interbank call loans, repos and government securities, always puts into consideration the influence of inflation. The stability of consumer prices, is after all, at the heart of monetary policy. With this in mind, it can be said that investments that have minimal risk premiums simply shield the value of the original sum of money (inflation-adjusted returns). On the other hand, opportunity costs and even the risk of loss are present whenever the asset management section of a life insurance company exposes its funds to the commercial bond market, equities market, foreign currency market and other financial instruments available to investors. With the exception of the more risky asset classes, risk-free securities such as government securities allow the investment professionals or the treasury of the life insurance company to project the most probable investment returns that they expose to financial markets. In any case, however, any investment returns realized are normally projected at the most conservative levels. In the interest of prudence and sound business practice, it would be hard to imagine a life insurance company relying on investment return projections or forecasts to answer for both death claims and operating expenses and so again we must defer to what had been emphasized all along, that the pricing mechanism of the life insurer already factors in all probable expenses as it conducts its business. A hurdle rate or revenue level must simply be achieved to assure that the company does not incur a net loss, barring of course statistical tail events.
During the operating year of 2007, about Php60.2 billion of expenses were incurred by the company. This represents the hurdle amount that must be exceeded by topline revenues, investment income, among other income generating activities.

On the Theory of Speculation

Bachelier’s Theory of Speculation gives rise to the practical use of higher mathematics (traditionally utilized for natural sciences) to the field of finance. In my opinion, however, it overlooks the fact that stock prices, among other observable financial data, form only a part of the market’s true identity. People also make-up the complex entity, that is the financial market. In fact, it probably gives rise to a question of whether the market ultimately influences the people or if people with all their thoughts, emotions and distinct trait of self-awareness keep the absolute quantifiability of financial markets illusive. Though the concept of randomness would imply that the market should be expected to ignore the past, because the market is composed of humans who give regard to the past, expectations may be influenced by previous facts, data and figures. Further reinforcing how market players remember the past is the evolution of technology, which has allowed finance professionals and analysts to look back to the past and continuously re-update themselves with the present. I believe that it then becomes a paradox with market players trying to outdo each other by anticipating the anticipants. Though there are instances of complete predictability in what investors may do, it may probably be due to instinctual survival behavior (e.g., when investors traditionally flood to the relative safety of US Treasuries during times of turmoil and highlights the EV theory of maximizing returns for minimal risk), if not simply grounded on simple, although non-absolute, academic training that US Treasuries are the best safe havens of money.

Investing in options is called a zero-sum game, even so, I think what makes it distinct from simple long positions in securities (say stocks) is that it encapsulates the amount of money that can be lost or gained given a timeframe. Options serve as instruments of speculation that integrate all the factors that influence expected prices.

Methodologies presented are for the observation of natural sciences and was eventually applied on asset pricing. Humans are natural creatures, measurable in many ways but unpredictable in others as well. Price is a function of value, but value is measured by human orientation, psyche and belief so it may be possible although not conclusive to say that price determination or the location of equilibrium will always vary.  Interestingly as markets become integrated, price/value become absolute anywhere people are able to value an object based on the “going rate”. This however may still involve the market setting a price that everyone will agree on. Markets may perhaps be inefficient, but it attempts to beat itself by continuously locating the true price of an object of interest.  Self discerning and with market players attempting to beat one another, methods and concepts in making money may ultimately be self defeating for everyone in the market. Some will succeed, but the approach is not a universal law, because unlike inanimate objects, people in the market attempt to outthink each other. People may be governed by natural forces as well measurable by mathematical approaches meant for the natural sciences, but their activities are still self-conscious and of free will. Interactions in the market are of people and not of molecules, atoms or anything fundamentally consisting of the universe.  Probability may still be an appropriate way to measure and study the market since proximity to the likelihood of human behavior takes into regard minute outliers to the ordinary.
“Science for Peace” with Professor Torsten Wiesel (February 1, 2010; Teresa Yuchengco Theater)

Progress and development in the field of science at the end of the Second World War had largely been influenced by the vested interests of national defense, especially by the polarizing presence of the two global super powers that emerged from the bloodiest conflict in human history. These super powers were the once powerful Communist USSR and the capitalist democracy of the United States, including its allies, all of whom held the world at the edge of its seat as the fear of a nuclear holocaust swirled around in distressful paranoia and proxy wars through the Cold War. Prior to arms-motivated endeavors in science, scientists once dedicated themselves to postulations, experiments, theory-development and invention for the benefit of their communities, the health of the public and ultimate enlightenment when understanding the natural world. Even as the Cold War came to a close and the U.S. took its seat as the dominant military super power on Earth, weaponry and conflicts remained the general theme for scientific/technological research and development. According to Professor Wiesel, political leaders do not have a strong background on the sciences and so are not akin to the passions, motivations and philosophies that endear scientists. Although each country has different means of legislating, law-makers must give appropriate attention to the field of science. Education, especially in the age of interconnectivity (i.e., the Internet) allows people to understand and remove any anxieties against and misapprehensions about the new and the unknown brought about by the efforts of scientists. Nuclear energy can be used for good or destructive purposes, but it depends on the wielder. Progress can only be achieved through the understanding of science. Scientists, especially the young ones, must reorient themselves away from a theme of destruction. Education and understanding must be encouraged, which would basically promote science for the benefit and harmonious growth of human society. In all practicality, man has gradually learned to mend and mold the laws of nature through his understanding of science and the natural world, especially in this age of genetics. Ethical standards and religions/moral institutions continue to treat developments in science as abominations of sorts. Scientists have begun to unlock the secrets of atoms and genes, that have brought about better understanding and unlimited potential to solving the problems and shortcomings of the world. Dr. Wiesel mentioned something about genetically modified food, which, although “unnatural” to the eyes of conservative zealots, is the most pragmatic way to eliminate hunger, poverty and marginalization amid the scarcity of natural resources; that in due time people would learn to accept and appreciate the advancements of science.

In my opinion the word “unnatural” is by all practical means and purposes malleable in meaning and semantics. Many have accused science of serving as an instrument of unethical conduct – that man should not be playing God and tweaking with the forces of nature. I, however, think that this is the extension of the quote, “Education is the great equalizer,” because it shows that knowledge can be applied to the benefit of mankind. Peace through the benefits of science can be achieved if everyone is bestowed with these advancements; otherwise, if discoveries are only for a few, then this all the more contributes to marginalization and inequality in society. Life is indeed filled with choices for a self-conscious and contemplative creature like man when contending with the whims of nature, coincidence, circumstantial convergence and probability. Man can exercise his free-will (which, theologically speaking under the Christian context, is bestowed upon him by the Divine) to improve his and his fellowmen’s lives. I think that once man is able to pull-out of the Economics of marginalization, that contends with the “efficient distribution” of scarce resources, then he will be able to move on to more noble and dignified endeavors. Science provides the key to not only understanding and discovering the natural world, but also a tool by which man can understand himself, his nature and his purpose. Science allows man to realize his humbling limits and his incredible capabilities within such a restricting timeframe of existence, for after all, we are all only a speck in the continuum.

The Deeper Side of Insurance

The business of insurance is indeed a capital-intensive commercial endeavor; this is what I have come to realize after thorough exposure to various literature on the industry, aside from the term paper Chip and I had presented two school terms ago. Underlying this reality, when put in a certain perspective, are the repercussions on how the dynamics of the local insurance industry and the market are influenced, especially by those who wield the most capital, i.e. the big-cap companies. In a relatively under-developed insurance market like the Philippines, I think upstart and small companies tend to settle in niche positions when dealing with an insurable public market. The homogeneous nature of the product and the anemic demand for what the industry is offering, i.e. security, protection and peace of mind from risks, are some of the reasons why companies are seemingly strangling themselves to garner market share. To have a pie of limited size to divide amongst each other and compounded by the lack of understanding by the public on the benefits of insurance, companies unduly expose themselves to compromises in operations and underwriting in order to save their topline growth.
What I have come to deeply appreciate about this phase, i.e. the insurance industry, of the financial realm is how it is “in touch with the realities and circumstances on the ground”. Having been exposed to capital markets, it is my opinion that virtual global markets that trade assets like equities, fixed income, currencies and commodities are disconnected from the immediate concerns of the common man. It is true that the field of investment (which is part of banking) is a critical cog in the mechanism of the global economy, however, its importance is more or less lost in the clutter of the capitalist system and an untrained or undiscerning eye does not usually blink or dilate to the events of financial markets. The essence of insurance, however, to me, is a different story all together. Insurance does not necessarily nor directly concern itself with the churning of the economic engine because it is concerned with the churning or rather the twists, turns and uncertainties of life itself. Now, certainly life as an all-encompassing experience to human beings is bigger than the purported concerns of economics, which academically tells us that it is concerned with the efficient allocation of limited resources. Insurance business as an enterprise relates to human fears, anxieties, concerns, and even socio-political/socio-economic requirements. This practically means almost anything under the sun can be the subject of insurance; such is the nature of this business. It does not necessarily function on financial sophistication and in fact prospers on the simplicity of “the arrangement” as a social device; “I, the insurer, am taking-on your (the insured’s) risk exposure that may or may not happen, in exchange for a price that I deem fair, as I pool your premium together with those who also want this arrangement, so I may pay, using the money from the pool, the ones who will experience losses.”