Function and Purpose as it relates to Securities and Disclosure

30 Apr

In trying to explain myself on Kid Dynamites blog (link later…) regarding my explanation of material disclosure, I made the following argument (Going to edit it a bit when I have some time):

I’ll try one last way. A much more philosophical construction. Function versus purpose.

Function is the properties of an item as it relates to what it does and is.

What are the functions of a ferrari?

If you press down on a gas pedal the wheels spin. It is constructed from metal. Turn the steering wheel left and the tires turn left. It is red. It can go from 0-60 in 3 seconds…

Each property above is quantifiable/verifiable by any party. These functions are the same and as true for you, for me, or even a cow you might run into on the road. Function is absolute and the same in all frames of reference. It describes who, what, where, when and how.

The purpose of something on the other hand is the narrative applied to items in the world. It is an entirely human construct.

What is the purpose of a shoe?

For most people a shoe protects your feet while you walk. For others a shoe is a fashion accessory or a collectors item. For a dog it’s a chew toy. For the bacteria living in the sole, the shoe is home.

Purpose is relative. It is frame of reference dependent. It is different for everyone. The purpose of an item describes Why it is. That we’re having this discussion illustrates that why as it applies to the item is impossible to define. Purpose does not exist without the person. Statements of purpose dont describe the item, they describe the person using the item.

Look at the difference in sentence construction between the ones under function vs the ones under purpose. In “function” the subject in the sentences is the item. The sentences tell the story of the car. In “purpose” the subject in the sentence is not the item. The item is the object here. As statements of fact these sentences describe you, me, the dog, and the bacteria.

The argument that KD, I and others are making is that since function is absolute, it can and must be the only way we evaluate materiality. The subject of disclosure is the item.

Setting the standards of disclosure as an item’s purpose is to make it relative, making the subject all the people using it and therefore impossible to accomplish. Even if the great majority of the population shares the same why. Purpose is never a shared statement of fact.

The functions of a security, what a security is, is a representation of assets. So long as the disclosures are a truthful representation of the assets, then materiality and the responsibility of an underwriter is fulfilled. While Paulson thinks the assets will go down is a fact, it is a fact about paulson and not the assets nor its representative security.

I understand why this discussion is so difficult. Humans have a propensity for applying narratives and purpose to everything. We then believe that these purposes are elements of the world, rather than elements of us. We are interested in the human aspect and perspective of the world. While we may find it of little import, these perspectives still never change what the world is.

Thousands of years ago, humans built a large ring of giant stones was built in Northern Ireland. This is stonehenge. In the absense of its builders everyone can still understand what was built. To this day no one really understands why it was built. We debate, and research and study ancient relics not because we want to know about the relics. Stone henge is and forever will be a pile of rocks. We pursue these studies to understand the people. It is the interest in other humans.
Knowing why stonehenge was built doesnt tell us about stonehenge, it tells us something about the people who built it.

This is probably worth at least some decent grade in a Ivy league philsophy course.


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