Pascal

Sent the following quote to some friends today "How can a part know the whole? Man is related to everything he knows. And everything is both cause and effect, working and worked upon, mediate and immediate, all things mutually dependent." Pensees by Blaise Pascal

When i read this quote, i was thinking along the line of Munger's multidisciplinary approach to decision making. Then i thought it was about always leaving room for uncertainty, or Feynman's notion on mankind's precious gift of "freedom to dobut". 

Then i got a reply from Guoyi, who said "...that the part cannot know the whole does not mean there is no whole. And all of man's pursuit can be said to be in search of that illusive whole, which if found, would render man no longer man, but God. Are all things cause and effect? How can we know if we cannot see the whole?"

Wow! Guoyi gets straight to the core of the question. And from Pensees, the following was put forth "But perhaps this subject goes beyond the capacity of reason." That explains why Wiki said that Pensees represented Pascal defense of the Christian religion. (and it is disturbing that i'm quoting Wiki like it is some sage or something). Included in the treatise, is the famous Pascal's wager, "You must wager; it is not optional... Let us weigh the gain and the loss in wagering that God exists... If you gain, you gain all; if you lose, you lose nothing. Wager, then, without hesitation, that He exists."

----------------------------------------------------------

Sometimes i wonder what have i gained from studying stuff i studied in accountancy? and Weifa asked me a good question last week, "would you trust financial statements?". I think i would now read financial statements with a HUGE pinch of salt. And at least i kinda know what is the the process that goes into 'making' the financial statements, so reading FS makes slightly more sense.

There is some sort of economic reality 'out there'. A FS tries to represent all that (at least the so called "true and fair" ones). Without knowing how these 'stuff' in real world is being represented in the FS, it makes no sense trying to analyze financial ratios and make decision based on a set of figures we don't even understand. 

Recent move by both SEC/FASB in the US and EU Committee/IASB to modify Fair value accounting rules when there is an inactive market would be a case in point. Without knowing the how the financial figures of Level I, II and III assets come about, how could we know what is the financial position of a firm (at least those with this sort of assets)? When people discussed about "marked to model", how many of us actually know the actual inputs to the model, what affects the model, what are they exactly modeling? What is the extent of disclosure needed? and analytical adjustments FS users should make?

If we do not understand how the accounting figures are created, how are we going to be able to understand the FS? 

If we don't understand the FS, then how can we claim that we understand the firm we are analyzing through its FS? 

If the FS itself does not even reflect economic reality then what should we rely on?

What is economic reality?

What is reality?