2 min read
"Perfect is the enemy of the good." This expression is often attributed to Voltaire, the French Enlightenment writer and philosopher. Earlier philosophers established the idea of the "golden mean," which is the desirable outcome between two extremes. The point these philosophers were trying to get across is this; perfection is impossible to obtain.
One of the most important principles of economics is the idea of diminishing marginal returns. Here's how it works. Thirty minutes of exercise is typically much more beneficial for someone in relatively bad shape, as compared to someone in great shape. The person in great shape likely has to work out many more hours to get the same additional health gains because they're already so healthy. Hence, the pursuit of perfection can be irrational because the effort required to reach perfection is likely infinite. In practice, pursuing perfection can create unnecessary stress that might result in a worse outcome. We are all imperfect and always have something we can improve upon. We can always eat a little better, work a little harder, exercise a little more and so on. Overlooking these slight yet stubborn defects can help us to enjoy our accomplishments big or small.
I believe we should view companies in the same light. No company is perfect. Every company can do something to increase its value to society and/or reduce its harm. Customer service could always be better, products could always benefit consumers more, production could always use fewer resources or be less taxing on the planet, and so on. In my view, evaluating a company's impact on society requires a holistic approach that considers both the good and the bad. For example, a company's production process might add greenhouse gases to the atmosphere resulting in global warming. However, the company's resulting product from this process is a lifesaving cancer drug. The company may be able to improve its impact upon the world by reducing its emissions but if it were to be judged by a standard of perfection, and consequently shut down because of its greenhouse gas emissions, then society would miss out on the miraculous therapeutic it produces.
If one takes a quantitative approach to judging a company's societal impact, then it is possible to judge whether the lives saved from a lifesaving pharmaceutical outweigh the lives lost due to the greenhouse gas emissions that are the byproduct of producing it. If it does, we should celebrate this positive impact the company has on society while at the same time discussing ways to increase the overall value of this contribution through the reduction of its negative offsets. This approach to judging companies can allow us to maximize total benefit to society in the present while providing avenues to increasing this benefit to society in the future.
About the Author
Ernesto Garcia brings many years of research experience at top academic institutions to his Quantitative Equity Analyst role at Humankind. Ernesto previously studied the liquidity commonalities in ETFs to determine the level of diversity they provide investors and to estimate the liquidity commonalities they drive in their underlying equities. He is ABD in Economics from The Graduate Center at City University of New York.