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Reflections: Saving and investing

Risky business
By John Tiemstra

One of the consequences of the curse human sin brought to creation is that things go wrong sometimes. Our plans don’t always work out. In other words, the world is full of risks.

We can protect ourselves from some of the consequences of some of those risks by taking out insurance. Insurance doesn’t eliminate risk, but shifts some of it from our shoulders to the insurer’s. Risk may even increase in such circumstances, because we may do less to reduce risk once we are protected from its financial consequences. (Insurers call this “moral hazard.”) We probably shouldn’t try to protect ourselves completely. That gets very expensive, and we need to give ourselves some incentive to keep risks under control.

Loans can reallocate risk in ways that are similar to insurance policies. Consider a loan to start a small business. The borrower shifts some of the risk of the business’s failure to the lender and in the process reduces her own incentive to control that risk. Of course, the borrower can make a great deal of money if the project turns out to be profitable, because the interest to the lender is fixed.  So this “leverage” can increase the entrepreneur’s rewards for success while reducing the loss in a failure. A smart lender will insist that the borrower have some of her own money invested in the enterprise and will evaluate the business plan very carefully.

The Hebrew Bible forbade any lending at fixed interest rates, at least among the people of God. In the Sermon on the Mount, Jesus extended this by urging his followers not even to expect the loaned money back. (Jesus was so economically naïve!) Most lending in those days was not for business purposes, but to tide over people who were having trouble making ends meet. Undoubtedly, these regulations mostly were meant to protect poor people from exploitation by the rich.

But maybe the Bible is also teaching us something about risk. We should be very careful about activities that have the effect of increasing risk or shifting our risks onto other people. There is enough danger in the world without doing things that are calculated to make us more reckless or to cause trouble to others.

For these reasons, the Christian church has always frowned on recreational gambling and until recent decades took a dim view of insurance, especially life insurance. Fixed-interest lending among Christians was forbidden until John Calvin made the argument that it could be acceptable in commercial contexts under certain conditions. This may strike us as an old-fashioned approach, but there is some wisdom behind it that we should recognize.

The church has been suspicious of the stock market for similar reasons. Stock ownership legally makes the stockholder a partner in the business, but in practice any control by stockholders is greatly attenuated. Stock investments can be useful for long-term saving objectives, but make sure you know what you’re investing in, or at least trust the investment manager of your funds. Diversify your holdings, not just across companies, but also across industries, to reduce your risk.

Questions for reflection:

  • Is casino gambling dangerous or perhaps evil? Or is it just good clean fun?
  • Do you have investments in stocks? What are the risks of your investments? How are they different from investments in bonds?
  • Are there good reasons to carry life insurance?

—John Tiemstra, Professor of Economics, Calvin College

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