Dinosaur Derivatives and Other Trades
Jeremy Josse’s Dinosaur Derivatives and Other Trades (Wiley, 2015) is by turns amusing and illuminating. He addresses big questions, asking what is value, uncertainty, a contract, a financial instrument, financial innovation, ownership, money, taxation, fraud, regulation, and a bankrupt. But instead of tackling these philosophical puzzles, as he calls them, head on, he eases into them by way of stories. “Each story is,” he suggests, “a thought experiment in the laboratory of the philosophy of finance.” (p. xv) Some of the stories are true, some come from literature, some are utterly apocryphal. But they all shed light on conceptual dark corners in finance.
The first chapter, from which the book takes its title, describes an auction for an option to buy, among other things, a Megalodon, a prehistoric shark that had become extinct many millions of years previously. “(In small print on the auction list, it did state that the option could be exercised only in the event that a Megalodon ‘should become available.’)” Another item up for bid was “a letter of credit presentable on the coming (or second coming—which ever turns out to be first) of the Messiah.” (pp. 3-4) This account of the frenzied auction for presumably worthless items leads into an insightful discussion of markets, value, liquidity, and manias.
The puzzle of uncertainty is introduced with the story of Joseph’s prophetic powers, his ability to interpret the pharaoh’s dreams in economic terms—that seven good years would be followed by seven bad years. Through his power of prophecy (call it a tip from God) Joseph removed the element of uncertainty from financial prediction. Subsequently chosen by the pharaoh to be “the equivalent of the Egyptian Treasury Secretary,” Joseph saw to it that during the good years the Egyptian state stockpiled grain and crop holdings. During the bad years, Joseph used this stockpile “to buy up everything he could. He vastly increased the state’s cash reserves” and bought up “land, livestock, and ultimately labor. In fact the story indicates he acquired more or less the whole economy of the then known world. Joseph and the Egyptian state effectively cornered the whole Fertile Crescent.” (p. 19)
Josse skillfully uses these stories to explain, in a way that a person with some knowledge of the financial markets and perhaps a penchant for philosophy could easily understand, some of the thorniest concepts in finance. For instance, he shows in what sense a financial instrument is a legal fiction, describes how John Rawls’s theory of justice is connected to “the wondrous workings of the convertible bond,” and exposes the gap (which can occasionally become blurred) between inalienable human rights and inalienable ownership.