Please note that for the purposes of this analysis, I use the Allan Bloom translation of Plato’s Republic. Please refer to a previous analysis on which I build upon here.
The tripartite theory of soul is a theory of psyche proposed by the Plato in his the Republic. It is one of the most famous propositions in the Republic. Plato asserted that the soul is composed of three parts; the rational (Greek: λογιστικόν, logos), the spirited (Greek: θυμοειδές, thumos) and the appetitive (Greek: ἐπιθυμητικόν, epithumia). These three parts of the soul also correspond to the three classes of the ‘city in speech.’ Whether in the individual or the city, justice is declared to be the state of the whole in which each part fulfills its function without attempting to interfere in the functions of others. Investors has much to learn from this rich metaphor that Plato proposes. Investment success, like justice, only comes from a proper internal ordering of one’s drives and dispositions. I argue, analogously, that the rational-led individual is the archetype of the prudent investor, the spirited-led individual is the archetype of the celebrity-activist, and the appetitive-led is the archetype of the greedy speculator.
In Plato’s dialogue, Socrates and his interlocutors construct a ‘city in speech’ in which they distinguish three social classes: the philosopher-kings (the rational), the guardians (the spirited), and the craftsmen and farmers (the appetitive). Socrates characterizes these social groups stating, “we assert that the three primary classes of human beings are also three: wisdom-loving, victory-loving, gain-loving” (Book IX, 581c). They are characterized by their drives and motivations. Socrates also characterizes them by their occupations, asserting that “aren’t there three forms in the soul… just as there were three classes in the city that held it together, money-making, auxiliary, and deliberative” (Book IV, 440e-441a). These individuals are caricatures of the three parts of the soul that exist in everyone, but an individual can resemble these caricatures depending on the ordering of these parts in their soul, according to Plato.
The appetitive individuals in the Republic are those craftsmen and farmers who lack wisdom and courage, but are only focused on material pleasures. While they are skillful in their crafts, Socrates says “For we called it the desiring part on account of the intensity of the desires concerned with eating, drinking, sex, and all their followers; and so, we also called it the money-loving part, because such desires are most fulfilled by means of money” (Book IX, 580e-581a). The appetitive are analogous to greedy speculators because they are only concerned with pleasures and gains. Their sense of satisfaction is directly material and are very short-term oriented in achieve these ends. Earlier in the Republic, Socrates called the city ruled by the appetitive as “a feverish city” (Book II, 372e) and one that is obsessed with relishes and “the unlimited acquisition of money” (Book II, 373d). Speculators are like these, they focus only on returns and lack the accompanying wisdom understand how prudence returns in the maximal long-term risk-adjusted returns.
Next, Socrates address the spirited individuals whom are represented by the guardians and auxiliaries in the Republic. Socrates states that “Don’t we, of course, say that the spirited part is always wholly set on mastery, victory and good reputation” (Book IX, 581a). These spirited individuals are nobler in their intentions than the appetitive individuals because their ends require courage and greater efforts to achieve. Nonetheless, the spirited individual who lacks an accompanying wisdom to guide then is described by Socrates as one who “no longer makes any use of persuasion by means of speech but goes about everything with force and savageness, like a wild beast” (Book III, 411d-e). The wisdom-less spirited individual is analogous to the celebrity-activist for they are obsessed with fame and reputation, and are willing to act like pompous savages in order to achieve these ends. These celebrity-activists are well-known for their personas, more so than their investing philosophy or returns, and thus will only be remembered in the short-term; unlike the truly philosophic investors, they will fade in the history books; just as the celebrity-equivalents of Plato’s times, the Sophists, have all but faded by name while Plato’s and Socrates’ legacies endured.
Finally, the wisdom-loving individual is address by Socrates, whom are represented by the philosopher-kings in the Republic. On this individual, Socrates states that “it’s plain to everyone that the part with which we learn is always entirely directed toward knowing the truth as it is; and of the parts, it cares least for money and opinion… Then would it be appropriate for us to call it learning-loving and wisdom-loving?” (Book IX, 581b). This individual put his love of learning and the truth well-ahead of fame and gain, for these philosophic types are the only of the three whose goal is the means, not the end. Thus, the philosopher-king, wisdom-loving type is the archetype of the prudent investor. As Socrates explains:
“Shall we be bold and say this: Of the desires concerned with the love of gain and the love of victory, some – followers of knowledge and argument – pursue in company with them the pleasures to which the prudential part leads and take only these; such desires and pleasures, so far as they can take true ones – because they follow truth – and those that are most their own – if indeed what is best for each thing is also most properly its own? … Therefore, when all the soul follow the philosophic and is not factious, the result is that each part may, so far as other things are concerned, mind its own business and be just and, in particular, enjoy its own pleasures, the best pleasures, and, to the greatest possible extent, the truest pleasures” (Book IX, 586d-e).
The philosopher type is Plato’s ideal: this individual is the purest, noblest, and most just individual because of their enlightenment and proper disposition. Indeed, Plato goes as far to assert that such a wisdom-loving individual is the more likely to achieve fame and pleasures, more so than the appetitive and spirited types, because they are the only type that focuses on the proper process, not just on the ends themselves. Therefore, the philosopher-king and wisdom-lover is akin to the prudent investor who loves investing for its own sake and remains true to the principles of sound investing. Such investors find that the maximal long-term risk-adjusted returns, and subsequent fame, are a natural result of this disposition. It is no surprise then that truly prudent investors, namely the likes of Ben Graham, Seth Klarman, and Howard Marks, are not only philosophic in their approach to investing, but they have also achieved outstanding long-term risk-adjusted returns and enduring recognition as a result.
In addition to delineating the different parts of the soul, Plato argues that there is a natural and proper ordering of these parts that produces good and worse individuals. On the best ordering, Socrates says, “I suppose our city – if, that is, it has been correctly founded – is perfectly good… Plainly, then, it’s wise, courageous, moderate, and just” (Book IV, 427e). Plato argues that only the wisdom-loving individual is the perfectly good individual. This individual arises from the proper ordering of the soul, analogous to the city, is makes this individual wise, courageous, moderate, and just. These are the four cardinal virtues of Plato, and that of most of the subsequent western tradition. Wisdom stems from the rational and wisdom-loving part of the soul, which yields wisdom when it is given command and is not suppressed by either of the spirited or appetitive parts of the soul. On courage, Socrates states:
“So a city is courageous by a part of itself, thanks to that part’s having in it a power that through everything will preserve the opinion about which things are terrible… The preserving of the opinion produced by law through education about what – and what sort of thing – is terrible. And by preserving through everything I meant preserving that opinion and not casting it out in pains and pleasures and desires and fears” (Book IV, 429b-c).
Courage is what allows an individual to hold steadfast in their convictions, especially in the face of opposition. Thus, courage allows the wise investor to have fortitude to take contrarian opinions and hold them. Courage is the proper application of the spirited part of the soul when it is under the guidance of the rational, wisdom-loving part, as opposed to the unharnessed ‘wild-beast’ of wisdom-less courage. Next, Socrates states that “Moderation is surely a certain kind of order and mastery of certain kind of pleasures and desires” (Book IV, 430e). Moderation is the result of the proper ordering of the soul in which the rational part is supreme. Socrates states, “moderation is like a kind of harmony… Because it’s unlike courage and wisdom, each of which resided in a part, the one making the city wise and the other courageous. Moderation doesn’t work that way, but actually stretches through the whole from top to bottom of the entire scale” (Book IV, 431e-432a). The investor must be moderate in order to be prudent, for moderation allows the wise and courageous investor to take control his appetites and balance risk with reward.
Central to the goal of the Republic, justice is the result of the well-ordered, perfectly good city and man. Socrates gives his own pithy definition, positing that “justice is the minding of one’s own business and not being a busybody” (Book IV, 433a). There is, in fact, a much deeper meaning to this definition as Socrates explains:
“But in truth justice as, as it seems, something of this sort; however, not with respect to a man’s minding his external business, but with respect to what is within, with respect to what truly concerns him and his own. He doesn’t let each part in him mind other people’s business or the three classes in the soul meddle with each other, but really sets his own house in good order and rules himself; he arranges himself, becomes his own friend, and harmonizes the three parts, exactly like three notes in a harmonic scale, lowest, highest and middle. And if there are some other parts in between, he binds them together and becomes entirely one from the many, moderate and harmonized. Then, and only then, he acts, if he does at in some way – either concerning the acquisition of money, or the case of the body, or something political, or concerning private contract. In all these actions he believes and names a just and fine action one that preserves and helps produce this condition, and wisdom the knowledge that supervises this action; while he believes and names unjust one action that undoes this condition, and lack of learning, in its turn, the opinion that supervises this action” (Book IV, 443c-e).
Justice for an individual man is an internal disposition and proper ordering of the soul. Each part of the soul has a task – reason, courage, appetites – and each must perform these tasks according to their rank within the soul. Reason, which is the commanding part, directs the spirited and appetitive parts to achieve the best ends, resulting in the maximal benefits for each of these parts.
Plato argues that if the soul is not properly ordered then a worse individual will be produced. This improper ordering, according to Plato, is the result of either the appetitive or spirited part of the soul seizing command over the rational part. Socrates explains:
“Mustn’t it, in its turn, be a certain faction among those three – a meddling, interference, and rebellion of a part of the soul against the whole? The purpose of the rebellious part is to rule the soul although this is not proper, since by nature it is fit to be a slave to that which belongs in the ruling class. Something of this sort I suppose we’ll say, and that the confusion and wondering of these parts are injustice, licentiousness, cowardice, lack of learning, and, in sum, vice entire” (Book IV, 444a-b).
Plato, through Socrates, argues that all of the vices occur from this improper orientation of the soul. Moreover, Plato asserts that such an ordering is unnatural because it necessarily creates factions within the soul, or to put it another way, an un-harmonized soul and a divided self. Plato asserts that only when the rational part is in charge will the individual acts with prudence and principles. This is, according to Socrates, the healthy disposition, as he says:
“I can suppose that a man who has a healthy and moderate relationship to himself and who goes to sleep only after he does the following: first, he awakens his calculating part and feasts it on fair arguments and considerations, coming to an understanding with himself; second, he feeds the desiring part in such a way that it is neither in want nor surfeited – in order that it will rest and not disturb the best part by its joy or pain, but rather leave that best part alone pure and by itself, to consider and to long for the perception of something that it doesn’t know, either something that has been, or is, or is going to be; and, third, he soothes the spirited part in the same way and does not fall asleep with his spirit aroused because there are some he got angry at. When a man has silenced these two latter forms and set the third – the one in which prudent thinking comes to be – in motion, and only then takes his rest, you know that in such a state he most lays hold of the truth” (Book IX, 571d-572b).
Socrates says that when this proper ordering is achieved in which the spirited and appetite parts are subordinate to the rational part, prudent thinking comes about. Moreover, prudent thinking is said to be closest to the truth. Thus, for investors, if one wants to be the most accurate in their analysis one ought to strive for prudent thinking. This can only be achieved with the investor focuses on their love of learning and investing in and for itself, and keeps fame and gain for their own ends at arm’s length. However, if one becomes a prudent investor, maximal long-term risk-adjusted returns and fame will surely follow.