Turn the Page

Truckin’, like the Do-Dah man.
Once told me you’ve got to play your hand
Sometimes your cards ain’t worth a damn
If you don’t lay ‘em down.

Sometimes the light’s all shinin’ on me;
Other times I can barely see.
Lately it occurs to me
What a long, strange trip it’s been.

— Grateful Dead, “Truckin’”

Well, ladies and gentlemen, it was bound to happen. Sometime around midday on this hot, quiet summer Saturday, some poor befuddled soul clicked a link that brought him or her to this site, thereby registering the one millionth visit to Your Humble Bloggist’s opinion emporium. The Earth continued to spin in its orbit, the sun continued to track across the sky, and—to the best of my knowledge—nobody reported hearing trumpet blasts signalling the beginning of the Interregnum. From these signs, I will venture to conclude that Life, indeed, Goes On.

It was slightly less than five and one-half years ago that your Masked Opinioneer first planted his standard in the sand of this new yet unapproachable internet. What began as a lark, a way to practice writing unrelated to my daily duties, and an editor- and copywriter-free zone for me to inflict my ideas and beliefs upon an unsuspecting world morphed into... well, frankly, not much more than that. Over the intervening years, the tone, topics, and breadth of material I have addressed here have changed, sometimes notably. But I still write because it is fun, I occasionally feel I have something useful to add, and to-date nobody has found an effective way to stop me.

Writing here has also opened me up to a broader range of insights and influences than I would otherwise have enjoyed as a blinkered member of the relatively cloistered and inbred society which comprises my personal and professional milieu. I have begun correspondence with a few individuals of apparent genius, whose knowledge and occasional wisdom has deeply enriched my own. And I am not reluctant to admit I have established a few close friendships as well, all with people whom I have never met in the flesh and likely never will.

* * *

What you, O Dear and Long-Suffering Readers, have gleaned from my self-indulgence is harder for me to discern. I hope I have contributed some valuable insights into the actual and proper functioning of the global financial system (two different things, sadly). I also hope I have introduced some of you to the work of writers, artists, and poets whom I find important touchstones and inspirations in my life. And finally I hope I have made some of you think a little more deeply about subjects outside of finance and markets with my occasional forays into more speculative and wider-ranging topics. Only you can decide whether I have succeeded in any or all of these objectives.

I do not kid myself that 1,000,000 visits over five and one-half years represents anything remotely approaching what a normal person would consider “popular,” or even influential.¹ This has been a cottage blog site for me and my readers. However, I do take comfort that more than half of you have visited here more than once over the intervening years. Either I have offered something worth a return visit or two, or you have appallingly short memories for the distress I may have caused you in the past. Either way, I will take the credit.

What I cannot take credit for, however, are the vast waves of traffic which have been sent my direction by far more popular and influential writers and aggregators than me. My writing is difficult, obscure, tendentious, and exceedingly long—not to mention frequently plain wrong—so it is with gratitude that I acknowledge the generosity of such titans of the econoblogosphere as Felix Salmon of Reuters, Tadas Viskanta of Abnormal Returns, and Josh Brown of The Reformed Broker. They, along with far too many others to properly mention, have been the original and ongoing sources of the majority of traffic and regular readers I have gained over the years. Thank you.

And thank you, O Dearest and Most Misguided of All Readers, for flattering my self-indulgence with your attention over the months and years. While it may do no credit to your judgment that you actually read my scribblings, it reflects a naïve generosity of spirit and charming gullibility which is all the more valuable for being so rare in today’s cynical, hyper-sophisticated, and charmless world.

In closing, I am reminded of David Niven’s reaction at the 1974 Academy Awards when his introduction of Elizabeth Taylor was interrupted by a man streaking naked across the stage behind him:

“... isn’t it fascinating to think that probably the only laugh that man will ever get in his life is by stripping off and showing his shortcomings?”

If I have done nothing more than make you laugh at my shortcomings, Dear Reader, I will be a happy man.

Ta for now.

Related reading:
And in the spirit of self-indulgence, I have collected a few pieces on cognate topics below—some obscure, some less so—which you may find amusing, informative, or both. If you do not, feel free to leave your criticisms and suggestions in the Comments section following. (Oops.)

On pseudonymity: Do You Trust Me? (February 23, 2011)
On my writing habits and philosophy: Fragments (February 26, 2010)
On my appalling wordiness: A Tedious Argument of Insidious Intent (May 6, 2007)
On this blog’s founding mythos: Molon Labe (September 1, 2008)
On my occasional descent into naughty language: Not Safe for Work (April 25, 2008)
On everything else not elsewhere categorized: Welcome to Duloc! (April 21, 2009)


¹ Editorial addendum by Mrs. Dealmaker: “Only five years? It seems like ten.” Everybody’s a critic.^2
2 Perhaps now you understand why I prohibit comments on this site. Mrs. D does not need any help.

© 2012 The Epicurean Dealmaker. All rights reserved.

Breakfast in Fur

The Cereus, which only blossoms for a night, withers away without any admiration from another in the wilderness of the southern forests; and these forests, receptacles themselves of the most beautiful and luxuriant vegetation, with the richest and most aromatic perfumes, perish and collapse in like manner unenjoyed. The work of art has no such naïve and independent being. It is essentially a question, an address to the responding soul of man, an appeal to affections and intelligence.

— G.W.F. Hegel, The Philosophy of Fine Art¹

Peter Aspden has written a piece in the Financial Times which I am still struggling to get my head around. It largely seems to be an unstructured lament about the corruption of art by commerce, but he does make the counterargument that the marketing of consumer goods emblazoned with the words and works of live and dead artists can somehow “be seen as an act of revenge by art on society.” Huh? This seems desperately, even comically wrong to me.

It is true that a number of artists he mentions by name—Jeff Koons, Damien Hirst, etc.—and many he does not have made careers which seem nothing less than performance pieces commenting on the dominance, allure, and corruption of commerce, money, and fame in contemporary society. Their work, and their lives, are grounded in ironic commentary on the place of wealth in society and its effect on the production and consumption of art, mediated through alternately hostile scorn for and obsequious subservience to it. It is a clever and potentially subversive program which I would find more entertaining if the basic subject matter—money, the people who have it, and how they spend it—were less mind-crushingly banal. I would also find its subversiveness more compelling were its practitioners less patently desperate to join the ranks of the plutocracy they mock.

But Mr. Aspden is exactly wrong if he thinks these court jesters are exacting some sort of revenge on commerce or that they are controlling it in any way. No, they have embraced the Great Whore of Babylon wholeheartedly, and they indulge themselves and their audience with ironic detachment and sarcastic mockery of the creature while they take her coin and enjoy her favors unshamefacedly. They are prostitutes who wink at the spectators while they take their customers’ money. They are in control of their own corruption, no more.

* * *

And commerce has been beating at the doors of art for, oh, approximately forever. Fine artists used to be simple craftsmen, of relatively low social status, who worked for those who could afford to pay them for decorative, nonutilitarian luxury baubles; namely, the rich. Only in relatively recent times did a myth emerge of the artist as some sort of tortured Prometheus, braving Olympian disapproval to bring the fire of wisdom and meaning to the huddled masses. But even then, and even now, fine art only exists at the sufferance of people with so much surplus wealth they can afford to throw it away on rotting shark carcasses and gilded sculptures of Michael Jackson with his chimpanzee.

And the common folk and bourgeoisie have always wanted a little taste of artistic glory too, even if it was no more that a poorly registered print of the Mona Lisa on a postcard. Mr. Aspden himself notes that museums have been selling reproductions of the works of dead artists for decades. Whom does this benefit? Certainly not Leonardo da Vinci or Vincent van Gogh.

As best I can tell, Mr. Aspden seems most upset that the estate of Francis Bacon—another dead artist, natch—is profiting from the sale of his wit and work on cashmere throws and coffee cups.

I’m not so sure about Bacon, though. His work was of a different order, and if we are to regard him as a masterly commentator on existential isolation and mortality, we are surely traducing his work by spreading it so thinly, on mugs, towels, silk scarves. We may live in a cheerfully ironic age, but there are limits. Bacon was trying to say something important about the human condition in his work. He struggled to say it, and we are captivated by the romance of that struggle. But the minute that the results appear on a kitchen tray, some of that subtle alchemical reaction between artist and spectator cannot help but be altered. We have lost something. The descent into kitsch is a one-way street and there is no turning back.

Really? I fail to see how the endless reproduction by museums and purely commercial enterprises of artistic masterpieces on postcards, cheap prints, coffee cups, neckties, and tote bags has done anything to cheapen the content or import of artists far more talented that Mr. Bacon. Do we value Botticelli or Bernini any less because their works have been reproduced on jigsaw puzzles? Of course not.

For surely the value of great art is in an important way orthogonal to the socioeconomic matrix in which it is produced and experienced. It cannot be tamed in the form of consumer goods. Likewise, kitsch cannot demean or degrade the message of Hamlet or the beauty of van Gogh’s irises. Kitsch can only demean and degrade bad or mediocre art, of which we will always have more than enough. Some bad art itself takes the form and essence of kitsch, like the immensely popular images of LeRoy Nieman or Thomas Kinkade. Popularity does not mean art is great, or lasting, or meaningful, but neither does popularity signal great art’s death knell. If Francis Bacon’s art really has something meaningful to say, I am sure it will withstand a few cashmere throws draped around the upwardly mobile living rooms of London.

Surely the socially aspirational deserve the right to signal their sophistication and taste as much as the wealthy, no? ² Besides, I very much doubt the ladies who lunch will start stocking their tea caddies with reproductions of Méret Oppenheim’s ode to oral sex.

Related reading:
L.H.O.O.Q. (July 29, 2007)


¹ As quoted in A. Hofstadter and R. Kuhns, Philosophies of Art and Beauty: Selected Readings in Aesthetics from Plato to Heidegger, 1964 edition, pp. 426–427 (as remembered). Emphasis mine. I have what I may presume is T.M. Knox’s more accurate translation of Hegel’s Aesthetics at hand, but I have always preferred Hofstadter and Kuhns’ more flowery translation of this passage, to which I was exposed in my halcyon youth. So sue me.
² Of which this blog, too, is another example. Yes, I partake of the condition of modern art: I am self-aware, and my subject is mostly myself. You people aren’t doing anything to entertain me.

© 2012 The Epicurean Dealmaker. All rights reserved.

50 Ways to Leave Your Lover

She said it’s really not my habit to intrude
Furthermore, I hope my meaning
Won’t be lost or misconstrued
But I’ll repeat myself
At the risk of being crude
There must be
Fifty ways to leave your lover
Fifty ways to leave your lover

— Paul Simon, “Fifty Ways to Leave Your Lover”

In the unlikely event Your Humble Blogosopher were ever called upon, O Indulgent Ones, to develop a required reading syllabus on risk management for senior executives and government regulators of financial institutions, I am untroubled to admit I would fail to include even one textbook or how-to manual of the mathematical ilk which purport to convey the principles of that noble calling. There are plenty of such already to be found on the bookshelves of industry practitioners and regulators, replete with concise derivations of Itō’s lemma, elegant mathematical notation, and perfunctory handwaving about the real behavior of real human beings in real market contexts. As I am not eager to advance the wisdom common to most of this literature—that greed, fear, and other messy human behaviors can be ignored in favor of a market model based on the diffusion of gas molecules in a box—I would search for inspiration elsewhere.

Instead, I would be much more interested in collating writings and writers who I feel might inculcate a healthy fear of hubris, an aversion to overconfidence, and a deeply uncertain view of the ontological underpinnings of our epistemological beliefs. In other words, Dear Readers, I would like to scare the everlovin’ bejesus out of anyone who has the presumption to be a risk manager.

Leading candidates for my syllabus would include cautionary authors and works like David Hume, Oedipus Rex, War and Peace, and anything by Montaigne. And, I am pleased to say, this little gem of a commencement address by Atul Gawande:

Scientists have given a new name to the deaths that occur in surgery after something goes wrong—whether it is an infection or some bizarre twist of the stomach. They call them a “failure to rescue.” More than anything, this is what distinguished the great from the mediocre. They didn’t fail less. They rescued more.

This may in fact be the real story of human and societal improvement. We talk a lot about “risk management”—a nice hygienic phrase. But in the end, risk is necessary. Things can and will go wrong. Yet some have a better capacity to prepare for the possibility, to limit the damage, and to sometimes even retrieve success from failure.

When things go wrong, there seem to be three main pitfalls to avoid, three ways to fail to rescue. You could choose a wrong plan, an inadequate plan, or no plan at all. Say you’re cooking and you inadvertently set a grease pan on fire. Throwing gasoline on the fire would be a completely wrong plan. Trying to blow the fire out would be inadequate. And ignoring it—“Fire? What fire?”—would be no plan at all.

There is fourth major pitfall, one which Mr. Gawande is perhaps too diplomatic to mention: insisting, in the face of incontrovertible evidence to the contrary, that the something going wrong is only doing so because other people (or things) are not acting according to plan. The common corollary to this position is that it is not your theory which is wrong, but nature is behaving unexpectedly or people are acting “irrationally.” We have seen this video before, and it wasn’t convincing the first time.

* * *

As the cleverer among you might suspect, I have said similar things at this location in the past. The point of risk management is not to prevent failure, for that is impossible. The point is to have a plan ready to manage and control failure when it inevitably comes.

It is my belief that many quants, hedge fund managers, and investment bankers came to believe—consciously or not—that, by explicitly embracing and accounting for chance, they had tamed it. They spent countless millions of man hours designing and implementing elaborate mathematical models and risk control systems based on aleatory principles that could predict, with remarkable accuracy, the variation in return and behavior of securities and derivatives under normal circumstances. They spoke confidently about “value at risk” and “maximum expected daily trading loss” as if they knew what they were talking about. As if those terms actually meant anything. And then they trotted off to their bank, or their prime broker, or the Discount Window to borrow a couple more turns of leverage against their proprietary positions.

But you cannot tame chance. That is what makes it chance. At base, implicitly attributing the kind of predictability these individuals seemed to ascribe to chance was a fundamental error, a category-mistake.

To use an example from the not-so-distant past, could the principals at now-defunct hedge fund Long Term Capital not see that pegging the odds of losing all their capital in one year at 10²⁴-to-1 against was ludicrous on its face? (And I am not arguing that Myron Scholes and the other LTCM propeller heads picked the wrong distribution for their probability estimates, as if settling on a Levy skew alpha-stable distribution with α = 1.8 and β = 0.931 would have been more accurate than a lognormal one.) In all intellectual honesty, how could they possibly know? Hubris, yes, but more importantly epistemic blindness was at play here.

For even if you have guessed (or calculated) the probabilities correctly, giving one-in-ten-million odds that a life-destroying asteroid will hit Earth in the next ten years does you no good when a Manhattan-sized meteorite is discovered hurtling toward Rio de Janeiro the following day. In retrospect, it seems pretty clear that it is far more important to plan how you intend to deal with an unlikely event when and if it does happen than to shrug and say it will probably never happen. Disaster planning and scenario testing are far more valuable risk management practices than fine-tuning the estimated volatility inputs to your CDO trading model.

Doctors like Mr. Gawande seem to have an instinctive handle on how to cope with the unexpected, probably in large part because they have seen or heard of so many “impossible” complications arising in a hospital context. They have a healthy respect for the unpredictability of the human body, and a healthy appreciation of the limits of their own knowledge and ability to predict its behavior. In one respect they benefit from a larger dataset of experiences to call upon than financial risk managers: people have heart attacks, surgical complications, and rare diseases with much higher frequency than we suffer from globe-rattling financial collapses. But the so-called Masters of the Universe could learn a lot from the humility of doctors, not only about how to prevent disasters from occurring, but more importantly how to recover from them when they do.

... we need to rediscover a little more respect (and fear) for the ineluctable and irreducible operations of chance in our lives, including in the markets. We need to keep reminding ourselves that having a 95% confidence level that our hedge fund will not lose more than 100 million dollars in a day does not mean it won’t lose $500 million tomorrow, or $75 million a day for ten days in a row. We need to rediscover that well-understood probabilities are usually more stable in the long run, so the whipsaw of short term events doesn’t blow us up before we can profit on our longer-term investments.

And it’s a good idea to have a plan, a direction in which you’d like to go. But it’s always a better idea to have back-up plans as well, alternate routes you have mapped out in case your main chance doesn’t work out as expected. Keep those in your back pocket, so you don’t frighten the Congressmen or limited partners you rely on into paralyzed immobility. But keep them nevertheless.

We probably have more than enough risk managers in the global financial system nowadays.

But we sure as hell need a lot more risk doctors.

Related reading:
Why So Serious? (December 10, 2008)
Nobody Expects the Spanish Inquisition (May 24, 2007)
P(x) = 1/1,000,000,000,000,000,000,000,000 (May 9, 2007)


© 2012 The Epicurean Dealmaker. All rights reserved.

Tumbling Dice

Always in a hurry,
I never stop to worry
Don’t you see the time flashin’ by?
Honey, got no money,
I’m all sixes and sevens and nines

Say now, baby,
I’m the rank outsider
You can be my partner in crime.

— Rolling Stones, “Tumbling Dice”

I must admit, O Dearly Beloved, that I have in the past viewed our national treasure and acclaimed fabulist Michael Lewis with a somewhat jaundiced eye. The man is undeniably talented, in his own way: blessed with a sure and steady voice and an unerring instinct for the always entertaining (if less reliably enlightening) story which illustrates the didactic point at issue. He is a master of illuminating larger social, cultural, and economic phenomena by presenting the personal history of one or more lonely misfits whose personal flaws, limitations, and talents throw into high relief the idiocy or blindness of the so-called “normal” people around them. And he can be very funny.

These qualities paper over a multitude of sins, in my book. And while I have been irritated in the past by Mr. Lewis’s periodically flip and lazy characterization of my industry in particular, and by a few misfires and lamentable howlers in general, I have to say the content or quality of his writing is not what has gotten my goat. The man is no Chesterton, to be sure—not even an A.J. Liebling. But honestly, Most Indulgent of All Readers, how many of us are?

No, what has bothered me most about Michael Lewis is the fact that he has been so obviously and incredibly lucky in his life and work. Not only to have stumbled, at the ripe and confused old age of 26, into a dinner meeting which led to a job offer at Salomon Brothers which most of his contemporaries would have killed for, but also to have been present at the origin of so many of the outrageous founding myths of New Modern Wall Street, which he ultimately released as Liar’s Poker, a book which launched not only his own writing career but also the careers of tens of thousands of future investment bankers, including—full disclosure—Yours Truly. To have followed this remarkable run with a series of happy happenstances apparently entirely out of his control which led to most if not all of his subsequent bestsellers. Even, to my disbelief, to the extent of picking up the story at the heart of The Blind Side by watching the silent, unexplained passage of the person who became the central character of the book, Michael Oher, in and out of the home of a childhood friend he visited in Memphis one Christmas holiday. I mean, this guy must have a four leaf clover stapled to his ass or something.

So I was heartened to learn that Mr. Lewis seems not only fully aware of his good fortune, but also eager to explain its importance to a few of our best and brightest:

The book I wrote was called Liar’s Poker. It sold a million copies. I was 28 years old. I had a career, a little fame, a small fortune and a new life narrative. All of a sudden people were telling me I was born to be a writer. This was absurd. Even I could see there was another, truer narrative, with luck as its theme. What were the odds of being seated at that dinner next to that Salomon Brothers lady? Of landing inside the best Wall Street firm from which to write the story of an age? Of landing in the seat with the best view of the business? Of having parents who didn’t disinherit me but instead sighed and said “do it if you must?” Of having had that sense of must kindled inside me by a professor of art history at Princeton? Of having been let into Princeton in the first place?

This isn’t just false humility. It’s false humility with a point. My case illustrates how success is always rationalized. People really don’t like to hear success explained away as luck—especially successful people. As they age, and succeed, people feel their success was somehow inevitable. They don’t want to acknowledge the role played by accident in their lives. There is a reason for this: the world does not want to acknowledge it either.

This is true, modest, and wise. And it almost makes up for the vicious if humorous abuse Mr. Lewis has been heaping on me and my brethren ever since he turned Judas and sold us out for his thirty pieces.

I hope he had an attentive and receptive audience. From what I know about hotbeds of lucky privilege and talent like Princeton, I expect he did. Most of these graduating seniors are young enough to remember the enormous element of luck which contributed to their admission to such an institution in the first place,¹ and the four years they spent with several thousand of the brightest and hardest working youngsters from around the world should have cemented the realization of their good fortune firmly in their brains. It is only later, when they are older, more forgetful, and more successful that they may begin to believe their own bullshit, and think the world owes them their privileges and success simply because they “earned” it. I hope, for some of them at least, that Mr. Lewis’s lesson sticks.

* * *

One final note. I am not a personal acquaintance or close friend of Mr. Lewis, so I claim no insight into the total shape or quality of his life. For all I know, his great professional success and public fame have come at the price of deep private tribulation and sorrow. I have no idea, and I therefore make no final judgment.

But I will say that I have heard enough second- and thirdhand reports about his life to know that he has made or at least recognized and grasped much of his luck. In person, Michael Lewis is a charming, gregarious, friendly man, who appears to have a bottomless interest in learning about the lives of the people he interacts with. He is a keen observer, and a good conversationalist, and he tells funny and interesting stories. These seem talents well-designed to support the career of a storyteller, and perfectly suited to drawing out the stories which each of his subjects carries around with him or her. There are plenty of smarter, more diligent, and more talented writers than he. And I am sure they miss hundreds of just the kind of stories that seem to fall into Michael Lewis’s lap simply because he listens well enough to hear them.

The moral of the story is this, youngsters: Be open to your luck, and alert to the opportunities life presents you. Just because your success depends in large part on good fortune, doesn’t mean you shouldn’t do your damnedest to chase it.

Good luck, and be careful out there.


¹ In addition to hard work, brains, and talent, of course. A personal anecdote: I ferried one of the Dealmaker progeny about on college tours not so long ago. At a small nameless college on the banks of the Charles River, the Dean of Admissions made the following remarks [paraphrased]: “35,000 students apply to Harvard every year. Our first task is to determine whether they can do the work. We look at test scores and grades to do this. Approximately 23,000 of you can do the work. We have 1,800 slots to fill in our incoming Freshman class. You do the math.”

© 2012 The Epicurean Dealmaker. All rights reserved.