The Devil's Financial Dictionary

This glossary of financial terms is inspired by Ambrose Bierce’s masterpiece The Devil’s Dictionary, which the great American satirist published sporadically between 1881 and 1906. (View free versions of Bierce’s text here or here.) Like Bierce’s brilliantly cynical definitions, the explanations presented here should not — quite — be taken as literally true. Some of these entries are adapted from articles published previously in Financial History, Money, and The Wall Street Journal.

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CAPITAL, n.  The wealth of an individual, company, or nation.

The word derives from the Latin caput, or head — paradoxically, the organ that many investors use the least in their effort to amass capital.

In Latin, caput was the head of the body or corpus; so in English, capital is the nerve center of the corporation or body of assets. (Chef, chief, achieve, chapter and capitulate all stem from the same Latin root.) The word capital appears not to have arisen in English until relatively late: Randle Cotgrave’s Dictionarie of the French and English Tongues (1611) defines it as “wealth, worth: a stocke, a mans principall, or chief, substance.”

All this, mind you, makes capitalism the art of using one’s head. But it also invokes the animal nature of wealth. In many cultures, livestock was the safest store of value. Grazing animals transform common grass into a steady supply of protein in the form of meat and milk — much the way capital, properly tended, can be a reliable source of investment income. Caput and capital may have come to describe wealth because so many pre-industrial societies measured prosperity by the quantity of livestock a family owned, counting it as so many “head of cattle.” The more head of livestock a family had, the more capital it had.

In the ancient Middle East — as in rural Africa and other parts of the world today — livestock was the most prestigious measure of prosperity. In the Book of Genesis, when Cain offers God an offering of “the fruit of the ground,” the Lord rejects it in favor of Abel’s sacrifices of “the firstlings of his flock.” Putting first things first, Genesis 13:2 describes Abraham as “very rich in cattle, in silver, and in gold.”

We tend to think of capital as quasi-permanent, but we would all be better off if we kept the origins of the word in mind: Like the livestock it is named for, capital is prone to wandering, stampeding, and even perishing if not carefully shepherded.


CATOBLEPAS, n.  A mythical beast resembling a bull, but with a head so heavy that it is incapable of looking up. The catoblepas also has a thick mane that always covers its eyes. Its breath is said to be poisonous.

From Jan Jonston's "Historia naturalis de quadrupedibus," 1614.

From Jan Jonston’s “Historia naturalis de quadrupedibus,” 1614.

In modern financial markets, the catoblepas is represented by the investor who says he will put money to work — just not today, because the economy is terrible and UNCERTAINTY is too high. Tomorrow, he will again say he will put money to work — just not yet. He will continue to look down and to hang his head. The higher the market goes, the more vehemently the catoblepas will insist he is really a BULL, the darker the view of his world will turn, and the more conspicuously miserable he will become.


CERTAINTY, n.  A state of clarity and predictability in economic and geopolitical affairs that all investors say is indispensable — even though it doesn’t exist, never has, and never will.

Certainty is nothing but a cognitive illusion: Just when you think you know what is sure to happen, the financial markets are about to prove that you are wrong.

Whenever turmoil or turbulence becomes obvious, pundits proclaim again for the umpteenth time that “Investors hate uncertainty.” Well, that’s just tough. Uncertainty is the only condition investors ever have faced, or ever will, from the moment barley and sesame first began trading in ancient Mesopotamia to the last trade that will ever take place on Planet Earth. Uncertainty is the most fundamental attribute of financial markets, and if you hate it then you shouldn’t even bother trying to invest.

Anyone who thinks that the future can ever be certain (either in the short-term or the long-term) doesn’t understand financial history or how the human mind works. The only certainty in financial markets is that the unexpected will occur — over and over again, until the end of time. Meanwhile, people will continue to make predictions about the future based on the assumption that it will be like the past. The more certain they are about a forecast, the more likely they are to be wrong.

The popular notion of “certainty” is particularly absurd in light of the definition of uncertainty as spelled out by the great economist Frank H. Knight in his Risk, Uncertainty and Profit (1921). As Knight pointed out, any uncertainty that can be reduced to specific odds, no matter how low the probability, “can be reduced to complete certainty.” If you knew, for instance, that an unlikely event had a 0.00001% probability of occurrence, then by definition the outcome wouldn’t be uncertain.

Applying Knight’s insight, uncertainty can properly describe only a potential outcome whose likelihood of occurrence is “not susceptible to measurement.” It is, simply put, the unknowable.

Investors should always worry that the unknowable will occur; sooner or later, it surely will. But hating the unknowable is a waste of time and energy. You might as well hate gravity or protest against the passage of time. Get used to it; uncertainty is here to stay, and you are not.


CONFLICT OF INTEREST, n.  A preposterously unlikely scenario in which the employee of a financial firm who could earn ungodly amounts of money by acting against a client’s best interest might proceed to do exactly that. Conflicts of interest are pervasive, if not universal, on Wall Street.  But they aren’t a problem, according to Wall Street, because financial firms do something better than eliminating them: “managing” them.  See also DISCLOSURE.


CONTRARIAN, n.  A sheep masquerading as a lone wolf.

To be a contrarian, you must buy when most others are selling and sell when most are buying — an act that sounds easy but requires almost superhuman emotional toughness. What’s more, most professional money managers would destroy their businesses if they thought independently, since most clients just want them to chase whatever is hot until it is not.

Much like the Judean crowd chanting “We are all individuals!” in Monty Python’s Life of Brian, every single professional investor believes he is a contrarian. Almost none are.

See also HERDING.


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