Please note that for the purposes of this analysis, I use the Richard McKeon translation of Aristotle’s Nicomachean Ethics. Please refer to a previous analysis which I build upon in this analysis.
Aristotle believed that in order to achieve virtue/excellence (Greek: aretē), one requires a different kind of wisdom other than theoretical wisdom (Greek: sophia). Greek philosophers before him, namely Plato and Socrates, focused on an abstract understanding of virtue as necessary to achieve virtue. Aristotle did not deny this, but he did not believe it was sufficient. For Aristotle, virtuous living also required a more particular and practical form of wisdom, which he called “practical wisdom” (Greek: phronēsis). Practical wisdom is an important principle that investors can learn from today; for knowing moral virtue (which is prudence for the investor) is not enough to be successful, one must also possess practical wisdom as a means to achieve those ends.
Before diving into practical wisdom itself, Aristotle lays out his groundwork for practical wisdom by defining what it means to “deliberate”. Aristotle makes the distinction between deliberation and wishing, as he writes, “wish relates rather to the end, choice to the mean” (Book III.2, 1111b) and “We deliberate about things that are in our power and can be done” (Book III.3, 1112a). Wishing relates to the goals we set, while deliberation relates to the how we analyze the realistic options that we have in our power in order to best achieve those ends (that we wish). With this background, Aristotle begins to define practical wisdom. Investing is a process of deliberation: choosing the most compelling opportunity among many options, judging and weighing the risks and rewards, etc. Speculation is not about deliberation, as very little thought or reason is applied. Rather, speculation is about wishing, to use Aristotle’s terminology.
Recall that Aristotle defined moral virtue in Book II to be a disposition to choose the mean relative to oneself, as determined by a rational principle. Aristotle now sets about to determine this ‘rational principle,’ which he calls practical wisdom. Aristotle states, “Now it is thought to be the mark of a man of practical wisdom to be able to deliberate well about what is good and expedient for himself” (Book VI.5, 1140a). Here, Aristotle asserts that practical wisdom to be a true disposition toward action, by the aid of a right rule with regard to things good and bad for men (i.e., it is the power of right deliberation about things good for oneself). Aristotle confirms this stating that Practical wisdom, then, must be a reasoned and true state of capacity to act with regard to human goods” (Book VI.5, 1140b). I assert the implications of this for investors are as follows: investors who wish to be prudent, and perhaps even understand what it means to be prudent, must still use a rational decision making process when assessing investment opportunities if they wish to achieve this prudence. The key here is the link between prudence and a rational decision making process which allows us to achieve the right means.
Aristotle is careful to dispel misunderstandings of practical wisdom. Aristotle says that practical wisdom is neither a science nor an art. He writes:
“practical wisdom cannot be scientific knowledge nor art; not science because that which can be done is capable of being otherwise, not art because action and marking are different kinds of things. The remaining alternative, then, is that it is a true and reasoned state of capacity to act with regards to the things that are good or bad for man” (Book VI.5, 1140a-b).
Unlike the scientific disposition, practical wisdom cannot be reduce to formulae. Because it is concerned with things that can be other than what they are, it has certain elements in common with opinion, as opposed to natural laws or fact. Unlike arts, practical wisdom is the quality of seeing what is good for oneself, or one’s group in regard to any question, as opposed to objects of the art, which are concerned with how things are made or how states are produced. Therefore, Aristotle concludes that “practical wisdom is virtue and not an art” (Book VI.5, 1140b). Similarly, investing cannot be reduced entirely to a science nor an art. It requires the deliberative-rational capacity of science but it operates like art; each case is unique and intrinsically subjective to a degree, and necessary room must be left for creativity and the like. The differentiating factor in investing as compared to science and art its focus on the process, and not the outcome. Therefore, experience has a crucial role in practical wisdom and in investing.
Experience, for Aristotle, is crucial to possessing practical wisdom. This is due to the fact that practical wisdom, unlike theoretical or moral knowledge, pertains to actions, which are necessarily particular. Whereas theoretical and moral knowledge moves from particulars to universals (which are necessary and unchanging, according to Aristotle), practical wisdom deliberates about particulars utilizing reason in light of universals. For example, Aristotle tells us that “while young men become geometricians and mathematicians and wise in matters like these [theoretical wisdom], it is thought that a young man of practical wisdom cannot be found” (Book VI.8, 1142a). Practical wisdom, however, “is concerned not only with universals but with particulars, which become familiar from experience, but a young man has no experienced, for it is length of time that gives experience” (Book VI.8, 1142a). The particular things which constitute the first principles necessary for the grasping of the universals (those which are reasoned from), however, seem to be able to be apprehended in a way different that those particulars which are pertinent to practical wisdom. The former kind of particulars seem able to be apprehended immediately, whereas the latter require experience. Nevertheless, they seem to both be apprehended by the same part of the soul, viz. intellect. Thus, it seems, that the intellect is employed in both the grasping of the first things from which the universals are reasoned to, and the particulars which constitute experience which allows for the possessing of practical wisdom. For young investors, theoretical knowledge of prudence stemming from close readings of value investing literature is no doubt important, but it alone is not enough to ensure that one reaches these standards in practice. Such theoretical wisdom allows one to aim at the right mark, but practical wisdom stemming from experience, allows investors to find the means to achieve these ends.
Aristotle writes that practical wisdom is concerned with human actions about which it is possible to deliberate. Moreover, since practical wisdom is virtue, it cannot be said to be wrong in your practical wisdom for that is akin to being wrong by your virtue. Therefore, practical wisdom itself is excellence in deliberation. Aristotle says this must be so because “it is evident that it is impossible to be practically wise without being good” (Book VI.12, 1144a). Logically speaking, possession of any moral virtue implies possession of practical wisdom, and possession of practical wisdom implies possession of all the moral virtues. Practical wisdom is thereby subordinate to theoretical wisdom, but since practical wisdom determines how theoretical wisdom is achieved in action and in self, it acts in the interests of theoretical wisdom. Aristotle confirms this writing, “it is not supreme over philosophic wisdom, i.e. over the superior part of us, any more than the art of medicine over health; for it does not use it but provides for its coming into being; it issues orders, then, for its sake, but not to it” (Book VI.13, 1145a). Aristotle then asserts that “the work of man is achieved only in accordance with practical wisdom as well as with moral virtue; for virtue makes us aim at the right mark, and practical wisdom makes us take the right means” (Book VI.12, 1144a). Aristotle implies here that a man with practical wisdom controls his instinctive tendencies and directs his own life to the highest good — the balanced development of his moral character (i.e., virtue).
Why do investors need practical wisdom? This is because Aristotle believed that every virtue can become a fault if not correctly applied. Frugality can veer into miserliness. Self-reliance can harden into prideful stubbornness. For Aristotle, being virtuous meant avoiding these extremes, by following the path between two vices: that of not applying a virtue enough, and that of applying it too much. He called this finding the “mean” of a virtue. For example, courage is the mean between cowardliness and recklessness. Loyalty is the mean between fickleness and blind obedience. Resolution is the mean between spinelessness and obstinacy. Practical wisdom, for Aristotle, is the ability to do the right thing, at the right time, for the right reason. Now this is easier said than done, which is precisely why we need practical wisdom. Because it is neither art nor science, its excellence in deliberation as determined by a rational principle allows a virtuous man to adapt to new challenges and different situations. For this reason, Aristotle believed that practical wisdom was the virtue that made all the other virtues possible. Without the correct application of practical wisdom, the other virtues would be lived too much or too little and thereby become vices. What this also means for investors is that it is not enough to presuppose our prudence, if we believe we know what prudence is, but we must also make sure we adhere to good judgment in our actions that are in accord with this virtue of prudence.
In summary, practical wisdom or prudence is excellence of the deliberative faculty of the soul and enables one to exercise right choice. It is the result of knowing the proper ends and having the experience to know the means; it enables us to choose the right means for attaining the right ends as determined by virtue. While not the same as virtue, practical wisdom makes the existence of virtue possible. The right rule reached by the deliberative analysis of a man with practical wisdom tells him that the end of human life is attained by certain actions that are intermediate between extremes. Moral virtue can be defined as obedience to this rule.