“I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong,
neither yet bread to the wise, nor yet riches to men of understanding,
nor yet favour to men of skill; but time and chance happeneth to them all.” –Koheleth
My favorite of the many brilliant verses in the Wisdom books of the Old Testament frames the problem faced by finance. Finance, said Roger Ibbotson, is the branch of economics that deals with time and uncertainty. While finance appears extraordinarily complicated, when simplified to its barest essentials it relies on two prices: the price of risk (chance) and the price of time.
We see attempts to discern the price of risk all over the place. The equity risk premium is the price of business risk – yet we can’t measure it, only give wide estimates. Insurance premiums measure the price of mortality risk, medical risk, and property risk. Betting markets can price just about any risk you can think of.
But what is the price of time? In what sense does time have a price? Why is it, of all these prices, the only one you can look up each day in the newspaper? (The price of time is the interest rate, in case you haven’t guessed by now.) And what can we learn from an intensive study of that price, across history and the extent of the globe?
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