Thursday, January 22, 2009

The Comming Age of Subjective Finance

To start with, we have three primary function of financial management – Investment decision , financial decision , and dividend decision . In the case of Investment decision, one has to decide on a capital investment proposal, whose net present value (NPV) is positive, and rate of return should exceed the marginal cost of capital. In the case of capital rationing, where the available capital is low , the investment proposal are selected, on the base of maximization of net present value. Further, those business plans, should be selected, as an individual project which should lead to an overall profitability of firm, enabling creation of wealth . Now, there are question on it ? The whole thing is dependent on human faculty of making decisions, by objectively looking at the facts, and analyzing the pattern. Obviously the question is of using the intellect, and creating right perception. However, often when an entrepreneur, develops a business plan, and moves to an investor, for making an investment decision, sometimes inside and sometimes outside the organization, he projects his thoughts on the entire planning process. The strength of his thought formation, can actually lead to an new form of reality . It could even change the perception of investor, and also influence the investment decision. This reflexive methodology, how individual with their thought projection , changes the reality is something could come in the domain of subjective finance . As, most decisions in real life both on the terms of capital investment proposal ( Investment decision ), and Capital allocation Proposal ( Financing decision on debt and equity ), and later Distribution of funds ( Dividend decision ), depends mostly on how an individual investor, or a collective investor, perceives the situation or potentiality of the proposal .

The reality of the fund allocation based on principles of financing management, of putting the funds in a situation , where the owners wealth, would be maximized, is a myth . As nobody knows, where and which forms of fund investment, allocation and distribution will maximize the wealth. They can predict, and the prediction will depend on the collective perception of the market, at that point of time . This collective perception of the capital investment proposal, is not always the reality of the capital investment proposal. It is how, the reality is perceived by certain group of people. For instance , the financial principle ,says that the liquidity available in the fund allocated in organization ,is reciprocal to the profitability of that fund at that point of time, in that organization . This do means that the fund, which is invested for a long period of time, has better changes of profitability. That’s how housing finance was seen as a most profitable area, as the funds are allocate for long term, and the available liquidity was low. But now with the housing prices depreciating , and the subprime crisis still there ,people are even questioning, about the reciprocal relation on liquidity, and profitability .

The root of any financial management is acquisition, ,maintenance and growth of the fund . There are process defined, for this objective, and one of the most significant process is to make right decision . Now, that is equally very subjective and depends on the psychological and the environmental condition, an individual is facing which will build his perception . Infact ,how he is comprehending his perception is also important . If he is seeing, around him, an widespread greed for wealth maximization, his comprehension, will be more reluctant to go the other way around . The agency theory points out, that managers are agents to shareholders, whom the shareholders give there power to make decision. So the power of decision making his very well distributed around the organization, at least in terms of theory. Though professional managers are expected, to move from higher interest , generally they are guided by self interest . Looking things from pragmatic point of view , if you have agents in the top of the financial institution , who is organizing the financial fate of people around number of nation ( given the fact that all these financial institution are present in number of nations), whose perception are deluded by self interest and greed , what kind of financial decision do you expect ? Don’t you think on such conditions a global financial crisis of this scale is a natural extension of a human psychological defect ?

Is it not the time, when we start talking about ‘subjective finance’ – which seems to be a very important of Ancient Indian Financial Schools of thought – based on Atharva Veda?

The subjective finance would be very different from behavioral where the characters of the financial decision maker could behave in according to certain policies ,but inwardly would sustain that ‘self interest and greed ‘. Behavioral finance could significant short term effects but not long term ‘character overhauling’ which the subjective finance could help . As it bring the real character of funds in front of humanity.

Wednesday, January 21, 2009

Finance - From Ancient to Modern

The root of business finance is the Government policy, which again is very much compliant with the viewpoint of ancient financial wisdom. However, there is a essential difference here , in comparision to modern financial progress and complexity of environment , the financer will take a role of facilitator rather than controller .The globalization and liberalization has merged the national economy with global economy . This brings eventually a tough situation, as Nation worked with boundaries, and there specifics to exercise control . However, when we talk about a vaster geography, across nations , we don’t have institution which could exercise this control. The ancient financial wisdom talks about acquisition and maintenance of Mother earth . Modern financial management talks about acquisition , maintenance and creating growth for the business . There is a fundamental difference here , whereis ancient financial wisdom is talking about acquisition and maintenance, it is talking from the viewpoint of welfare of the subjects and satisfying them. On Contrary, financial management is talking from the viewpoint of acquisition and maintenance and growth of a small group of people which is known as shareholders . The subjects of ancient financial wisdom are broader and involves a country and its inhabitant.

The problems we face now, in the economic context are

1) National economy and world economy has got fused with globalization and liberalization.
2) Business are subjected to multiple regulatory framework which in itself is diversified and not integrated.
3) The Government policies are still rooted on national boundaries whereas business has to most deal with something beyond national boundaries.

In a whole, the modern financial management does give a idea about acquisition of funds and growth of them as a primary objective, and makes the statement that it could be done with facilitation – which means delegation of the control to different people.
The delegation if it has to be done ,it has to be done to right kind of power, who have proper sense control, and who don’t fall in the circle of greed . The basic objective of the financial managers, is to make the benefit of the shareholders, and grow and make profit for the fund which has been procured . This brings a very big question about the responsibility of the shareholder and the financial manager . What is there responsibility ? Is it just to grow in material world and make profit ? What is the cost of that profit ? How that profit could be balanced with the social and environmental agenda . How those people could be created who could have right spiritual values to handle the funds which are delegated to them and the authority given to them to manage the funds .

It seems that the basic function of Modern financial management, is more related to a small entity, rather than a larger entity call Mother Earth.However the viewpoint of ancient financial wisdom is based on Mother Earth, which makes it more appropriate on the terms of understanding and practice.