The Poker Face of Wall Street
By Aaron Brown
Hardcover: 368 pages
Publisher: Wiley (March 31, 2006)
ISBN: 0471770574
Rating – 4 stars
The Pointed Pundit received this reply to his review of Aaron Brown's book The
Poker Face of Wall Street.
"I'm sorry you didn't burp more.
"I plead guilty to raising more questions than I answer, and to including lots
of sketchy arguments and loose ends. I admire people who can tie everything up
in neat bundles, but I'm never tempted to work in fields where that has already
been done. I don't think anyone knows enough about gambling or finance to write
with Euclidian precision from assumptions to theorems. Okay, I'm miles short of
Euclidian precision, and I could have done a better job, but in the end I
decided to sacrifice organization to keep my voice. My editor and several
critics agree with you that it was a bad idea, or at best a good idea taken too
far. But other people, and not only people related to me, liked the choice. I
didn't try to write a book that everyone would like.
"On the specific point of underpriced put options as a cause of the 1987 crash,
I don't believe that public trading of those options led directly to the crash,
I believe that the idea that volatility had to be constant inflated stock
prices. It's easy to see in theory that if people underestimate the probability
of large price declines, they will think stocks are more attractive and stock
prices will be too high. The mechanism is that people use financial engineering
to build products in which the risk/return ratio for stocks (based on historical
volatility over a period with no crashes and implied near-the-money option
volatility) is overwhelmingly favorable. When those models break because actual
volatility is higher than expected, prices revert to fair (or possibly fall
below fair in panic).
"My main evidence for this is that constant volatility pricing of options
disappeared overnight in all markets, not just stocks. There was no major FX,
interest rate or commodity move, yet the same thing happened to their options as
to stock options. You didn't see a large underlying spot price effect, because
only in the stock market is the out-of-the-money risk so strongly one-sided
(out-of-the money puts sell for much more than calls of the same moneyness, in
other words, crashes are bigger and sharper than sudden upturns; FX, interest
rates and commodities are more symmetrical, big moves in either direction are
closer to equally likely).
"My main interest is not in what caused the crash, but in how option prices
realigned. There were certainly other things that pushed the stock market down
that Fall. The underpriced puts were like gasoline vapor in the air, it still
took a spark to cause the explosion. If someone says the trigger wasn't a spark
but an explosion in its own right, I might agree. I don't say underpriced stock
options were the only or ultimate cause. I'm more confident than volatility
structures were the result of the crash.
"You are correct that DeSoto did not find Indian casinos. I don't know how he
missed the billboards, they're all over the place.
"We do know that many native American tribes, including those in the Mississippi
Valley, indulged in high stakes gambling. The trouble is the descriptions are so
colored by European ideas that it's hard to determine how much of the activity
was goods exchange versus conflict resolution versus recreation. I had a very
interesting conversation about this with Murray Gell-Mann, who told me there is
a museum in St. Louis that will give me great insight into this question, but he
wouldn't tell me what I would find. I haven't made it out there yet to check.
"However, if you accept the thesis that John Law's Faro dealers inspired poker
and derivatives trading, you have to give some credit to the natives. Poker and
derivative trading ideas were not confined to French Louisiana, nor to places
with Europeans in constant trade contact with New Orleans. Many of these places
were not accessible by early steamboats. The most plausible cultural
transmission vector is the natives. They may have been only apt pupils rather
than innovators, but it's hard to believe the seeds flowered so quickly if there
were no cultural tradition of using gambling exchange."
Written by Aaron Brown
November 21, 2006
10:45:00 AM
The Go Point
by Michael Useem
Hardcover: 288 pages
Crown Business (October 3, 2006)
ISBN: 1400082986
Rating – 5 stars
The art of being decisive is one of the most daunting
skills an individual can acquire.
Some decisions require split-second reactions; others are
made with the “luxury” of consideration. Both types often carry awesome
implications for careers, organizations or families.
Michael Useem, a management professor at the Wharton
School, dissects this moment of truth, the moment when you have to say “yes” or
“no” in his book The Go Point. Using vivid narratives he places the reader in
the middle of people facing critical decisions. People, whose action or lack
thereof, will have profound implications.
Readers find themselves enveloped:
With Robert E. Lee as he orders his General George picket to make an
almost suicidal charge against the Union lines in Gettysburg.
On the face of a mountain with the leader of a firefighting crew making
life-or-death decisions without critical information about weather patterns.
In the office of a newly appointed head of a scandal-wracked corporation
tottering on the brink of disaster.
Using decision templates rooted in tangible experiences
accompanied by decision tools Useem analyzes these difficult moments. Out of
his discussion emerges sound advice for spanning the “knowing-doing gap.”
Well-written and deceptive in its simplicity, this is one
of the finest and most practical books the Pointed Pundit has read on decision
making.
Don’t hesitate; go read it.
Penned by the Pointed Pundit
November 21, 2006
9:53:25 AM
The Poker Face of Wall Street
By Aaron Brown
Hardcover: 368 pages
Publisher: Wiley (March 31, 2006)
ISBN: 0471770574
Rating – 4 stars
Anyone who works on Wall Street senses the truth in Aaron
Brown’s thesis, gambling is a fundamental brick in the foundation of economic
and investment thinking.
Brown has done it all: poker player, options trading, risk
and portfolio management and finance professor. He draws on this experience,
using poker as a narrative spine; he weaves a tale of the crossroads between
finance and gambling, economics and risk.
The resulting book is insightful, thought-provoking,
entertaining, yet frustrating. In many ways it is similar to the seemingly
filling meal that leaves you hungry as soon as you burp.
For example, on page 96 Brown asserts that the Crash of
1987 was caused by under-priced exchange-traded puts which lead “people to
invest in the stock market without assuming risk.” This is a unique and
provocative interpretation on a subject in which I have a great deal of
interest. The subject is dropped. Six pages later, it is re-introduced with
the conclusion that “(f)or financial quants, the revelation was that risk has a
price.”
How we got there, the Pointed Pundit is not quite sure. I
have re-read the section several times and I am still puzzled. You had an
extended bull market. The public was buying calls and shorting puts. The
professionals were doing forward and reverse conversions, which are tied to the
money rate. It seems to me, the options trade where they trade. That is
the point of a free market, is it not? An explanation of how put pricing
triggered a six sigma event is lost. It is an intriguing thought; worthy of
exploration. Yet, it remains undeveloped.
Another example: Brown assets that Hernando de Soto
discovered in the lower Mississippi “the most sophisticated and successful
pre(-)industrial economy in the world.” Raw materials and finished good were
distributed over an area of thousands of miles. It was done without money,
writing, long-distance communications, common language or culture.
Brown takes a hunch and attributes it to gambling.
Interesting thought, yet no support is offered. The Pointed Pundit is sure de
Soto did not find Indian Casinos add support to the author's claim.
After reading page after page of abstractions,
generalizations, personifications and unsupported conclusions, the Pointed
Pundit got frustrated. The book rates four stars. Despite Brown’s inability to
construct and articulate a cogent and articulate argument, he is on to
something. After all, stock trading in Germany is regulated under that
country’s gaming laws.
Brown is entertaining. Unfortunately, his book leaves, as
the academics say, room for lots of addition research.
Penned by the Pointed Pundit
November 17, 2006
3:16:17 PM
Why Size Matters
by John Tyler Bonner
Hardcover: 176 pages
Princeton University Press (September 13, 2006)
ISBN: 0691128502
Size matters.
It determines what any organism can do. Yet, size is
relegated to the sidelines of scientific study. It is usually studied only as a
corollary of another variable – speed, longevity or metabolism.
John Tyler Bonner, a retired Princeton biology professor,
changes that. By examining stories from “Alice in Wonderland” to “Gulliver’s
Travels” grants size its scientific due. In this well-written and
easily-understood book, Bonner spans the giants and dwarfs of the human, animal
and plant kingdoms. He explores the physics of size in biology, its evolution
and its role in the function and longevity of living things.
Size rules all things: strength, surface, complexity,
living processes and abundance. No endeavor escapes its tentacles.
It is a small wonder that Bonner addresses his subject in
as lucid and conversant manner as he does in this small, but pointed and
thought-provoking book.
Penned by the Pointed Pundit
November 10, 2006
8:56:31 PM
Monday, November 06, 2006
Coping with Copious Choice
The Paradox of Choice
By Barry Schwartz
304 pages
Harper Perennial; Reprint edition (January 18, 2005)
ISBN: 0060005696
Rating – 5 stars
We are living during a time of copious choice. Prosperity
washes us with abundant possibilities. Yet, when we receive what we thought we
wanted, we often find ourselves wanting.
Barry Schwartz, a Swarthmore College professor, citing
research results from psychologists, economists, market researchers and decision
scientists makes five counter-intuitive arguments in this book, The Paradox of
Choice: Why Less is More. We would be better off if we:
Voluntarily constrained our
freedom of choice.
Sought “good enough” instead of
“the best.”
Lowered our expectations about
decision’s results.
Made nonreversible decisions.
Paid less attention to what
others around us do.
Schwartz notes we are constantly being asked to make
choices, even about the simplest things. This forces us to "invest time,
energy, and no small amount of self-doubt, and dread." There comes a point, he
contends, at which choice becomes debilitating rather than liberating. Too much
of a good thing becomes detrimental to our psychological and emotional
well-being, he states.
In the final, Schwartz offers an 11-step program for
reducing choice’s “tyranny.”
Choose when to choose.
Be a Chooser, not a picker.
Satisfice more; maximize less.
Consider the opportunity costs of
opportunity costs.
Make your decisions
nonreversible.
Adopt an “attitude of gratitude.”
Regret less.
Anticipate adaptation.
Control expectations.
Curtail social comparisons.
Learn to love constraints.
I have always had trouble accepting the virtues of what
Isaiah Berlin, the political philosopher, terms “negative liberty” or “freedom
from.” In my mind “positive liberty” or “freedom to” is always the preferred
option.
Schwartz’s book makes a compelling case, however, that less
can be more.
Penned by the Pointed Pundit
November 6, 2006
10:24:50 AM
