Business – Richmond Writing

Metaphor of the Month! Moral Hazard

I try to sneak in words from the world of business here, and today’s metaphor comes just in time, as two banks associated with the Tech Sector have collapsed, or come so close that their assets got seized by the Federal Government.

Today, on my way in to work, I heard the term “moral hazard” associated with banking. I’d more likely consider it a term for a lost weekend in Las Vegas or New Orleans.

Investopedia provides a succinct definition for our metaphor that maps well onto what has happened recently, namely the “risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity. In addition, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.”

The entry continues to discuss the lack of consequences faced by the party who breaks faith and, let’s be honest, betrays the others involved. In the cases of our banks, they appear to have either taken on risky investments or engaged in other practices that put depositors’ money at risk.

It’s reprehensible to me, but then my financial advisor ranks me as a moderately conservative investor. I try to keep risks low, at least long-term ones.

So to me, playing with others’ money is immoral. The OED provides an 1875 date of first year, and it emphasizes an outcome rather than initial behavior. The entry cites the insurance industry, where “the effect of insurance on the likelihood of the insured event occurring; the lack of incentive to avoid risk,” which reminds me of the FDIC’s coverage, in theory, of only the first $250,000 in an account. The entry cites a recent example of usage, “Ted Galen Carpenter of the Cato Institute, a free market think tank, argues that a big financial bail-out would risk creating perverse economic incentives or moral hazard.”

Will unlimited bail-outs of wealthy investors’ deposits create incentives for more risk-taking by new banks? Perhaps.

I’m not Cato-Institute material. I’d prefer we regulate banks tightly and punish more bankers with felony time, not punish the depositors (however wealthy). To me, these courses of action guarantee a moral outcome. Only one banker was jailed after the 2008 financial crisis. Fining banks did not stop what we are seeing today.

Nominate a word students need to learn by e-mailing me (jessid -at- richmond -dot- edu) or leaving a comment below.

See all of our Metaphors of the Month here and Words of the Week here.

Image courtesy of Nick Papakyriazis at Flickr.

Word of the Week! Solvent

I build plastic models as a hobby, and for much of the work, among the adhesives I employ a glue that works as a solvent. It dissolves things, making parts stick by making polystyrene soft.

Our word has, in business, nearly a contrary meaning. One who is not bankrupt and can pay debts is also called “solvent.” Instead of taking away something, solvency here adds solidity. Or perhaps solvents that work as adhesives add strength by temporarily weakening?

Yet that cannot be the case: if you have worked with strong enough solvents, you know that they dissolve completely the substance called a solute, resulting in a solution. Yes, I got a C in college chemistry.

It amazes me that both senses of our word, the two most commonly heard nowadays, date to about the same time, if one studies the OED entry.

Incidentally, we often speak of the bankrupt as “insolvent,” a sense not used with chemicals (as far as I know).

This post will remain a mystery to me. Why did such different meanings emerge from the same Latin roots? That’s one of the things I most enjoy about looking at familiar-seeming words. “Solvent” has a frequency band of 6 (of 8) at the OED. it’s a daily word.

Nominate a word students need to learn by e-mailing me (jessid -at- richmond -dot- edu) or leaving a comment below.

See all of our Metaphors of the Month here and Words of the Week here.

Image of solvents courtesy of Wikipedia.

Word of the Week! Fungible

Two mushrooms walk into a bar. The bartender shouts “Out with you! No plants allowed!”

One ‘shroom replies “Hey, I’m no plant! I’m a fungi!”

Okay, it’s not only a bad joke, but it should be “a fungus” (singular) for you botanical purists. In any case, I did just check and fungi are not considered plants.

When my colleague Professor Jack Molenkamp, Visiting Lecturer in Business Law and Adv Business Law in the Robins School of Business, requested our word, that old joke reared its fungible head. Yet why “fungible” for a bad joke?

In law or business, a fungible commodity can be exchanged for another without “breaking the terms of a contract,” as The OED patiently explains. We see this at rental-car agencies, when the Nissan Sentra you planned to rent gets replaced by a Toyota Corolla. Under the terms of the rental agreement, you get a compact car in return for the daily fee; no guarantee of color or model gets stated. If one reads the small print, it specifies that another make can be substituted. Thus, anything fungible can be broadly considered “interchangeable” or “replaceable.”

As Thanksgiving approaches, consider the self-inflicted plight of Neal Page, Steve Martin’s character from the brilliant Planes, Trains, and Automobiles. Trying without success to get home in time for Thanksgiving, Neal encounters one disaster after another, raging at a clerk that he just wants to get into a [expletive deleted] car. No dice for Neal. He should have read the contract that he threw away in anger; his car is gone from its parking spot but without the paperwork, the rental agency has no legal obligation to provide another fungible asset to replace the one for which he just paid.

Like Neal’s car, a fungible item, or side dishes offered with the entree (without an upcharge) at a restaurant, the subject of a “walk into a bar” joke can be exchanged infinitely for other subjects without changing the terms of the joke. Thus my favorite:

A three-legged dog walks into a saloon in the Old West and says “I’m lookin’ for the man who shot my paw.”

Okay, I’m done. My colleague did not need bad jokes, but he did need to tell me how greatly it puzzled him that his students did not know the meaning of “fungible.” I agree with him: anyone in business or law needs to understand the concept of fungibility.

As with “pagination” last time, I lay the blame on students not being serious-enough readers. You cannot acquire a strong vocabulary without reading. Sorry, students. Since few students read blogs, I again address my audience of faculty and staff. What are the key words in your field that an undergrad should know before getting a degree?

Why does the lack of reading among students (and peers!) irritate as much as, say, Neal’s situation in the rental car lot?

Nominate a word students need to learn by e-mailing me (jessid -at- richmond -dot- edu) or leaving a comment below.

See all of our Metaphors of the Month here and Words of the Week here.

Photo mashup by me. I prefer the Corolla’s grille and hue.

Word of the Week! Volatility

This post, so close to the end of the academic year, begins a new series focused on words that every undergraduate should know from the realms of business and economics. I’ve covered one before, amortize, but that’s rarely a concept needed in one’s 20s.

So I’ve asked faculty and professionals for words that they feel every undergrad needs. Kristopher Olexy, of Capitol Financial Solutions, recommended this term and another I will cover here soon.

Why begin with volatility now? We live in volatile times. You’ll find a good entry on the term at the OED, yet it does not capture Mr. Olexy’s sense of market volatility. He means rapid and unpredictable movements of the stock markets. As a long-term investor I don’t tend to panic with the DOW drops, but many ups and downs in he broader S&P 500 can give me the jitters.

So what does “market volatility” mean? I turn to an investment source for beginners, from Fidelity International:

when a market or security experiences periods of unpredictable, and sometimes sharp, price movements.

People often think about volatility only when prices fall, however volatility can also refer to sudden price rises too.

Let’s see how the S&P has done over the past year, using data from Bloomberg’s free market charts: year-to-date return? Down more than 12%!

Should I panic? When I look at the one-year return, there’s an increase of 1.32%, not enough to outpace inflation but rosier than that big drop. And the five-year return? Nearly 92%. Now I feel good.

So has the past year been one of market volatility? If so, why?

It looks volatile. If you’ve not been under a rock, factors driving volatility include the war in Ukraine, the lingering pandemic, associated supply-chain and labor shortages, political turmoil in the United States, energy prices. All these variables, the Fidelity site notes, increase volatility.

While I’d rather live in boring times, we have to play the market we have, as investors large or small. My students recently expressed their love for crypto-currencies, an investment vehicle I would not touch with your money. But they are young and can take a greater risk on a very volatile market for crypto. I won’t. Stocks can be unsettling enough.

Aside from that, what should a college student know about market volatility? Not panicking at a first drop in prices is one. Volatility is normal, within reason. It’s also good to accept more of it when young, because too few grads start investing early enough (I did not until my 30s). Imagine putting a few hundred away in one’s 20s, each month, and seeing that blossom into hundreds of thousands by retirement, in addition to other investing and despite volatility.

So I tell college grads not “plastics,” the mantra from the coming-of-age film The Graduate. I tell them to “start investing now. Volatility is okay at 20. At 60, you might lose sleep over it.”

Do you have a word or metaphor for this blog? Send them to me by e-mail (jessid -at- richmond -dot- edu) or leaving a comment below.

See all of our Metaphors of the Month here and Words of the Week here.

Image courtesy of Pixabay