Finance for Good

In his very interesting book “The new Financial Order” Robert J. Schiller talks about the importance of further developing finance to democratize it. He argues that the insights of finance have only been applied in a limited way. Democratizing finance, he argues, means effectively solving the problems of gratuitous economic inequality. He also claims that finance has to go beyond the domain of physical capital to human capital to cover the risks that really matters in our lives.

I totally agree with him. I think that there is so much more than finance can do and I do not think that it is a matter of whether this will happen or not but rather of when this will happen.

Professor Schiller provides some very interesting ideas about livelihood insurance, income linked loans, inequality insurance and other very interesting ideas. I would like to make the case here that people should analyze and manage the risks in their lives and hedge some of them using financial tools.

Let’s take for example the case of cancer. Cancer is an awful and growing disease. In the US, the probability of developing cancer is 1 in 2 for men and 1 in 3 for women. However not so many people hedge against this risk! How can one do that?

First, there are behavioral aspects of it that people can pay attention to. It has been proven that a balanced diet (low in fats!) and doing sport can help us limit this risk. Second, we could try to look for solutions to the problem. Obviously, we are not wise scientists capable of understanding or even expressing any meaningful thought about such a complex disease. However, we could do more to provide resources to the researchers that dedicate their life and talent to look for cures.

We are already doing this, to some extent. Annual R&D budget by the top 500 pharma and biotech companies reaches around $125b. This is quite a bit of money but if we divide it by the population of the countries where these companies were mostly born (US+EU+Japan= around 1300m people) the yearly investment in finding new drugs is around 95 USD/person. In addition to this, governments and foundations put sizeable amounts of money to work on research but it is no more than a fraction of the amount cited above and obviously not all of this money goes to find cures for cancer.

If a citizen wanted to invest in finding a cure to cancer he could invest his money in the equity or bonds of a pharmaceutical or biotech company or on a biotech index or he could give it to a foundation. This would be a good proxy for hedging himself but it would not be a great one in the sense that not all of these companies make similar efforts to find cures for every type of cancer. If in the family of this investor there were a specific gen related propensity to develop some type of cancer, he or she may not be able to put his savings to work to try to find a cure to that specific cancer.

Moreover, cancer is not the only risk for human health for which there is no cure. Let´s take Alzheimer, according to a recent report by the Alzheimer´s Association, one in six women aged 55 and older, and almost one in 10 men aged 55 and older will suffer Alzheimer. Unfortunately, we seem to be far from finding a cure to alzheimer and it is not easy to find alternative ways to invest money on its cure.

In our age of crowd financing and social media, it is hard to believe that we have not yet found a way to create channels to provide hedging solutions to individuals who would like to invest in cures to diseases. It is true that most of those investments would be very risky and so the fraction of savings invested should always bear in mind other circumstances of each individual but it is also important that we invest time, talent and effort in creating new channels, new securities, new tools though which, gradually, we offer economic agents solutions to live a better life, a safer life and to manage better their economic and human risks.