In an article in the ABA Banking Journal, Patrick Ward invokes Newton’s third law of motion to help ALCOs think about risk in their investments: Sir Isaac Newton, Laws of Motion, and Banking Capital. According to Ward:
Conceptually, Sir Isaac’s third law applies to the current Federal Reserve policies, interest rates, and banks’ investment portfolios–specifically, the unrealized gains or losses within an institution’s Available for Sale (AFS) portfolio.
Clearly invoking the scientific authority of “Sir Isaac” does some work for Ward and the ABA. Unfortunately, the example Ward (or perhaps an editor at the ABA Banking Journal) uses to illustrate Newton’s third law is a poor choice (a better illustration of Newton’s third law might be this sled video).
Although many readers of the ABA Banking Journal probably have a Newton’s Cradle somewhere in their office, that quintessential executive toy does not really demonstrate Newton’s third law by showing that “for every action there is an equal but opposite reaction.” Instead, a Newton’s Cradle comes closer to showing the conservation of momentum.
It is unclear how Newton’s third law, variously described as a theory and an analogy, or the conservation of momentum apply to banking investments. It probably doesn’t really matter, “Sir Isaac” confers social and cultural cachet.
One reply on “Stretching Newton’s Third Law to apply to Banking?”
[…] Social Newtonianism seems to be on the rise. Recently Newton’s three laws of motion were used to describe traffic in Manila and before that Newton’s third law of motion was used to assess risk in banking investments, which I wrote about here. […]