Does modern financial theory make sense? Peter Thiel, founder of Paypal and prominent venture capitalist, says no, and does so strongly.
Speaking to a packed Burden auditorium, Thiel attacked the view of the world that has taken root in America—a view in which individuals cannot possibly have definite, deterministic views of what life will be like in the future. “We’re a society that’s incredibly heavily dominated by a view of the future that’s radically indefinite, all probabilistic, nothing certain…anybody that says ‘I think this is the way the future’s going to look’ will be treated with…contempt.”
What does that have to do with financial theory? In modern financial theory, individuals are faced with an indeterminate future in which markets fluctuate based on new information. Individuals cannot possibly have views of the future that are superior to the information already captured by the market.
In this system, Thiel argues, “All you can do is just sort of iteratively make choices and get options at different times.” There are no benefits to long-term planning—individuals are left to respond to short-term fluctuations. The efficient market hypothesis is the idea, according the Thiel, that “people can’t have ideas.”
Thiel used Facebook founder Mark Zuckerberg as a contrasting example. Thiel declared, “The single most important thing Facebook ever did was that they never sold the company.” From a probabilistic, indeterminate perspective, Thiel continued, it made sense on more than one occasion to sell the company. Who knew if they could make money, or if the company would continue to grow? Apparently, Zuckerberg did—he refused to sell. In his view of the future, Facebook was profitable, and so there was no need.
Not all countries suffer from this cultural problem. According to Thiel, China
has a very definite view of how the country will look—they will grow with globalization, with more factories and more highways. However, according to Thiel, this growth is driven by “copying the U.S.” This is the inherent incompleteness of globalization—no new technology will be developed solely because of global expansion.
Thiel used the example of globalization as being going from one typewriter to one hundred typewriters. Technological innovation is like going from typewriters to word processors. Moreover, technology is critical to enable global expansion—without it, Thiel continued, the world will not be able to sustain the standard of living of the America model if it is replicated throughout the planet.
Unfortunately, in America, “technological progress is stalled out.” How can technological progress be increased? According to Thiel, one potential way is to “Discourage people from pursuing humanities majors…. The reality is you’re just going to be a lawyer.” Thiel encourages an increased focus on science and technology, and expounds upon the benefits of science fiction, and the deterministic view of the future there entailed.
More importantly, remember that “life goes on and on.” He describes not to plan for the next two years, but instead to plan for the next twenty—to “live your life as though it’s going to go on for long time, if not forever.”