By Leo M. Tilman
Reviewed by Jon Ford, CFP®
Jon Ford owns CF Financial Planning Solutions, Inc. in Mesa, Arizona. He writes a regular "Financial Fundamentals" column for the Cedar Falls Times in Iowa.
The central argument of Financial Darwinism is that businesses should replace the "old-regime economic performance equation" with a "risk-based economic performance equation." Economic performance under the old-regime is based on the difference between the sum of returns on assets and total fees, and the sum of returns on liabilities, expenses and the total cost of capital. Risk-based economic performance, on the other hand, is the difference between the sum of balance sheet arbitrage, principal investment activities, exposures to systematic risks, and fee-based businesses, and the sum of cost control and the cost of capital. The author points out that the new-regime applies to both financial and non-financial corporations.
Financial Darwinism is peppered with ideas from already familiar innovators. You'll recognize the inspiration of Edward Deming whose promotion of dynamism in Japan's post-World War II business reconstruction didn't hit the mainstream of innovative managerial thought until the 1990s. Running through the book are shadows of the risk-related literature common to both the professional and nonprofessional economic communities. You'll recognize the work of Merton and Ibbotson as well as concepts from Who Moved My Cheese and The World Is Flat.
The book offers readers the basics for integrating upper-level managerial thought with risk-conscious economic decision making. Italso helps explain why nearly all financial institutions began offering investment management services about a decade ago. Beyond that, it doesn't appear to have much useful application to practicing financial planners.
At varying levels, Financial Darwinism reminds all of us of the complexity of measuring the results of human and investment variables in a dynamic and often unpredictable ("wild cards," "black swans") economic environment. Attempting to shift the measurements to the forecasting arena is an entirely different and heretofore, apparently unwieldy exercise.
For instance, the author presents a number of exemplary "business world recalibrations." These are companies that have proactively enhanced the risk-based economic performance equation and business model transformations. What else do these groups have in common: Bank of America, Wells Fargo, AIG, and Lehman Brothers? I can't help but wonder to what extent the unprecedented and dreadful consequences to the world economy and my clients' portfolios resulted from institutional acceptance, perversion perhaps, of risk-based leveraged investment decisions.
My suggestion is that Financial Darwinism be included with a number of other readings in upper-level graduate school seminars in finance and/or economics. With a solid background in both management and risk-related probability studies, readers will be much more able to assess its potential contributions.
John Wiley & Sons, Inc. (2008)