Risk Is Always With Us

A question that has been asked, but not nearly often enough, is why did the complex risk defrayal methods fail so completely during the global financial crisis? The GFC proved that risk measures based on INTERNAL measures, i.e. measures within the system, will fail. At the time of the GFC many participants thought they had defrayed their risk only to find out that they had not.

What is needed is a measure of risk that is EXTERNAL to the system. This is a logical necessity. The financial system works of the assumption that risk can be shifted from individual exposures. But risk cannot be eliminated, it can only be moved, something that was obvious to many outside observers but not to financial practitioners. What happens is that the risk is moved on to the system, which exposes all participants in ways they cannot anticipate. That defeats risk management. This is particularly evident with the proliferation of high frequency trading, where we are seeing stop loss orders fail because of system melt down.

An anthropologist friend, Dr Larry Cromwell, calls this vulnerability. When added to risk measures, it can give a much better chance of being able to defray risk effectively. Certainly something is needed that is outside the financial system. It is analogous to the famous incompleteness theorems of Kurt Godel, the Austrian philosopher which is stated thus:

If the system is consistent, it cannot be complete.
The consistency of the axioms cannot be proven within the system.

This should be mandatory reading for any financial analysis of risk. As Godel showed, even a basic arithmetic equation requires some external element to be validated for it to be proved. Anything else is self delusion and it was just that self delusion that plagued practitioners in the lead up to the GFC. They believed they had covered all the options that were possible, only to get a nasty surprise.

Godel has profound implications for many areas of science, including physics, mind and machines, computerisation . But it is rarely, as far as I am aware, used in financial analysis. It should be, if only to serve as a reminder that even if the mathematical systems are pure on their own terms, they cannot be complete. And when we add in the fact that financial markets are full of people who understand the risk analytics and can exploit them, we can see how far we are from having risk defrayal systems that will actually work.Which means getting fee income prove difficult. Can’t have that.

First step in looking at vulnerability is to scale the potential risks, which means looking at a measure that comes from outside the system itself. Cromwell sayswhat is needed is an assessment of scale and scope:

 “Scale” has to do with the degree of destruction; “Scope” has to do with spread of effect. Low-Scale Wide-Scope vulnerabilities and High-Scale Limited-Scope vulnerabilities can be ranked in the same ranking table: Low-Scale Wide-Scope would be e.g. pandemic virus, where huge numbers of workers were afflicted with few or no deaths but very wide economic disruption; High-Scale Limited-Scope would be e.g. World Trade Centre.  The GFC has been Low-to-Medium Scale Very Wide-Scope–and as such, like the Boiling Frog, it did not notice its own approaching demise (“it” being the denizens of the financial system, collective in their observations and awareness).

So-called “systemic risks” are all Wide Scope; some of them ‘open the door’ to some very High Scale consequences here and there, until the door is closed (through recognition of the systemic nature of the vulnerability.

The point about measures such as scope and scale is that the point of perspective comes from outside the system. If Godel were a financial trader, he would no doubt agree that is essential.

Comments

  1. I’m not sure how one gets a measure from outside the financial system, when everything IS the financial system, or reliant thereupon.

  2. They have to be non financial measures. i.e. measures that do not use money as the metric, which are then cross referenced with monetary measures. Your comment that “everything IS the financial system or reliant thereupon” is the assumption commonly used. That is what I am questioning. For instance, it is often said that the financial system relies on trust, which of course it does. That trust cannot be measured by using money; money is its consequence. So a measure of trust is external to the system, for instance.

    • Sell on News said:

      Your comment that “everything IS the financial system or reliant thereupon” is the assumption commonly used.

      For a great read on how the theology that “everything IS the financial system or reliant thereupon” became scientifically and philosophically fashionable—-the philosophy and science du jour—-there’s the chapter titled “The Myth of Self-Interest and the Science of Cooperation” from Peter Turchin’s book, War and Peace and War.

      As Turchin points out, the moral and intellectual father of this stealth-religion was Niccolo Machiavelli (1469-1527). It was then evangelized by Thomas Hobbes, Bernard Mandeville, Adam Smith, and most recently by the Austrian and neoclassical schools of economics, as well as schools of philosophy like those of David Seabury (The Art of Selfishness, 1937) and Ayn Rand (The Virtue of Selfishness, 1963).

      As Turchin goes on to explain:

      **quote**
      To ancient and medieval thinkers such as Aristotle, Thomas Aquinas, and, above all, Ibn Khaldun, it was obvious that it was cooperation that provided the basis of social life. Beginning in the early modern period, however, this certainty was gradually abandoned by most influential social thinkers. By the end of the twentieth century, the “rational choice theory,” which postulates that people behave in entirely self-interested manner, became the dominant paradigm in the social sciences. Any theories that invoked cooperation as moving force of history were ridiculed as unscientific….

      During the twentieth century, the ideas of Mandeville, Smith, and many others have been developed and systematized into what is now know as “the theory of rational choice.” The core of the theory is the postulate that people—-“agents”—-behave in such a way as to maximize their “utility function.” In principle, the utility function could be almost anything, but in practice almost all applications of the theory in the mainstream economics equate utility with material self-interest. In the most basic version, the utility is simply the dollar amount that an agent expects to get as a result of a certain action. The agent then should perform the action that yields the greatest payoff—-this is what “maximizing utility” means. Agents that behave in ways that maximize their utility function are “rational.”

      **end of quote**

      • This doco series linked below (wiki) analyses the premise that people primarily operate from self interest and how that has been harnessed by modern politics in organsising our society. Fascinating stuff if you are interested in understanding why society today is as it is.

        “Yes Minister” the tv series is featured in the doco. It characterised the space where self interest, Politics and economics all come together.If one wants to understand economics these days, Yes Minister should be required viewing IMO. “The Trap” has a bit to say about dear old Sir Humphrey.

        http://en.wikipedia.org/wiki/The_Trap_(television_documentary_series)

        To the question from Sell on News;
        “why did the complex risk defrayal methods fail so completely during the global financial crisis?”

        I think one key answer is relationships. Those charged with regulating and auditing the Financial System in fact are the Financial System. It’s not about rules or regulations, it’s more about enforcement and exercising control (or lack thereof). Regulators regularly swap between the Authority and the Banks and v v. They all went to school together, network that same industry, socially mix and inter-marry etc. The Financial System is a Society. The facade they want us to see is one of probity and financial rectitude. In reality it’s a very big wealthy influential (closed) Club. Try to regulate or exert regulation over that. As an example, read up on the City of London and it’s still powerful control over England , International Banking and beyond.

        A good book that explains some of how these relationships prosper, with Govt blessings, behind the curtain and how Govts roll over to the Financial complex;

        http://treasureislands.org/

        Warning: Some sections may make you feel a little ill!

      • Thanks the reference to the Trap. Working my way through episode 1.

        The comment by buchan that the ideal politician is someone who is motivated by self interest is interesting. He did not like zealots with a vision re the public interest.

        Considering the general view that our current stock of politicians lack the vision thing or a clear sense of the public interest should we conclude that his preferred world has come to pass. Is the party hack on both sides the purest expression of this process. Does that include our current stock of senior public servants or are they complying under protest.

        Or if compliant with the anti-zealotry mindset (antagonistic to the public interest) should we consider that they are capable of reform and being reengaged with the public interest – vision thing.

        I am looking forward to the final episodes where i assume some guidance is provided as to how the public interest is to be identified to guide the zealots in pursuit of good works.

        Initial impressions are that there is a lot of bath going out with the bathwater.

      • That is very much the intellectual progression, a relentless removal of human beings from the centre of what humans have created — their economic and monetary system (“utility” and “rationality” are not about what is human, they are about what can be mathematically systematised). The latest meta money absurdity is, of course, high frequency trading.

  3. Part of the problem may be excessive enthusiasm for models and abstractions from day to day life.

    The empirical world seems to bore a lot of economists even though many accept that their models are a poor approximation for reality.

    Rather than focus on making models that better reflect ‘reality’ which may be a tail chasing exercise they would better off seeking to identify economic irrationality in the real world and make the reduction of that irrationality the focus of their attention.

    For example:

    A housing market is a critically important economic market to any economy and we have one that is fundamentally broken. Repairing that market so that it efficiently delivers housing stock should be a number 1 priority but rarely is that discussed – though there are some signs of improvement.

    Interest rates are another area. A fundamental measure that should be used to monitor the status of economy and the balance between desires to save/invest and consume, is instead seen as lever to be yanked to force the economy to comply with some model.

    Education and professional occupations/ trades accreditation are another area ripe for some serious reform to increase efficiency.

    If economists spent more time examining markets that are not efficient and working out solutions ( that may involve more or less regulation) and less time trying to calculate models and methods of limiting the risks of current market disfunctionality we may be better off.

    Less idealogy and less abstraction and more focus on the mundane issues of ensuring efficiency in the markets for essential goods and services might be a good objective.

    That might be the start of external criteria for assessing whether our financial/economic system is working.

    • Pfh007 said:

      Rather than focus on making models that better reflect ‘reality’ which may be a tail chasing exercise they would better off seeking to identify economic irrationality in the real world and make the reduction of that irrationality the focus of their attention.

      So instead of economics being a descriptive enterprise, it should be a prescritive enterprise? Instead of being a science, it should be a religion?

      Even thouh your mandate is a pretty good description of the current state of orthodox economics, I think a rather strong argument can be made that this is exactly the sort of ontology and epistemology that landed us in our current predicament.

      • “Instead of being a science,”

        Economics is not a science, not by any stretch. Unless of course you are talking to an exconomist.

        Economics is a profession. That’s all it is. Mathematics is a science. Let’s not confuse the two.

      • I am not sure I understand how you managed to convert my comment into a call to treat economics as a religion let alone via a pathway of also calling it a science.

        And to make matters worse you then tried to suggest that the ‘mandate’- recommendation would be a better choice of words – had something to do with orthodox economics.

        If anything my comment was directed to the complete opposite of your mis-interpretation.

        Rather than rely on the pseudo science of orthodox economics and using macro-economic models to drive policy prescriptions, my suggestion was that economist should instead focus on the hum drum day to day habits of everyday life and investigate the extent to which the operation of actual markets in goods and services might be improved.

        In some markets that might involve less regulation and in other more regulation.

        My point was quite simply that the big picture/macro will remain a source of dysfunction when our day to day markets are riddled with often bizarre inefficiencies and rent seeking behaviour.

        I do appreciate that there are schools of thought which seek to identify an alternative model of producing and distributing services that do not involve markets at all and I wish them the best of luck but at this point, they do not appear to offer much comfort.

    • Interesting discussion all,

      I guess the issue in question is not the use of models per se – science is all about observing the world and trying to build models that account for these observations, models are how we understand the world.

      The issue in economics appears to be the adherance to a philosophical doctrine (self-interest as a primary motivator, invisible hand, etc, as discussed above), and the building of models based on this (whether or not the assumptions inherent in these axioms are correct or not). For economics to be a true science, practitioners must be without bias, and be willing (and in fact seek) to be proven wrong. This cannot happen within the current finance-kidnapped paradigm.

      Pfh, I would very much love it if economics – as a social science – shifts towards observing and attempting to understand human organizational structures in order to improve them, rather than enforce society to conform to their false models. In which case, I think the rigorous mathematical tricks economists rely on would have to play a secondary role to psychological research for quite some time.

      On a side topic, in early schooling years I remember efforts to instil the value of cooperation, but after about primary school I don’t recall having heard the word much at all…

      • Having watched the first episode of the trap I can see where Glen5875’s hair trigger association of any mention of ‘analysis’ or empirical research’ with some huge totalizing machine comes from.

        All i can say is that i am sure that it is possible using analysis and research to expose the incoherence of our current housing market and come up some useful solutions without sliding down the slippery slope to some dystopian nightmare where some nerd with a calculator prescribes the parameters of our happiness.

      • “The issue in economics appears to be the adherance to a philosophical doctrine (self-interest as a primary motivator, invisible hand, etc, as discussed above), and the building of models based on this (whether or not the assumptions inherent in these axioms are correct or not).”

        Holding an unsophisticated view, I think all this modelling is a means to an end. Modelling is one of the products economists sell. Other products being their record and quality of forcasts. Economists need an income too. And therein lies the profit motive of economists. It is tempting to tell us what we want to hear just like any good salesperson or to pedal a product deemed valuable by those thought to be willing to pay.

        The various schools of economic thought seem primarily responsive in their nature ;trying to explain what has happened and/or trying to provide a rationale on what to do next to improve apon a particularly contentious period in the evolution of societies. In fact the so called “schools” seem to be products of the various European/ Anglo societal eras which spawned many political and social philosophies, rather than objective constructs of how market economies actually work.

        Economists past and present (MB excluded of course!) are not immune to trying to mold opinions and society to favour their value set or belief system. Anyone reading an economic report or studying economic theorum would be wise keep this kind of covert influence in mind.

      • “Anyone reading an economic report or studying economic theorum would be wise keep this kind of covert influence in mind.”

        Precisely, uncritical acceptance of anything is unwise but one of the themes of the ‘Trap’ seems to be a suspicion of those who seek to probe beneath claims of the ‘public interest’ from a doubt that such a thing can exist.

        It seems to me one accept there is something called the public good but critically claims that a policy is based on it.

      • It seems to me that one can accept there is something called the public good but critically scrutinize claims that a policy is based on it.

        One finger iPad typing!

      • “but one of the themes of the ‘Trap’ seems to be a suspicion of those who seek to probe beneath claims of the ‘public interest’ from a doubt that such a thing can exist”

        My take is “The Trap” is endeavouring to expose that “the public interest” is a well crafted ploy created to justify all manner of self interests, particularly in Govts. The “Yes Minister” tv series being a satirical demonstration of that argument.

      • I think i will to watch it again as by the end i wasnt quite sure what point was being made.

        It appeared that a bunch of zealots from the positive school of stuffing liberty down throats took a shine to a negative conception of liberty and decided to apply their usual techniques to spreading their somewhat ‘distorted’ idea of negative liberty.

        Seems more like a bunch of disaffected trots decided on a new cloak ‘neo-con’ for their desire to make the world a better place.

        There didnt seem to be much of Berlin’s ideas in what they actually tried to do in phillipines, chile, nicaragua, iraq etc.

        I didnt feel that hopeful that i should rejoice when the next bunch of world changers come along with happy clappy stories of mass group hugs.

      • Lighter Fluid said:

        I would very much love it if economics – as a social science – shifts towards observing and attempting to understand human organizational structures in order to improve them, rather than enforce society to conform to their false models.

        Exactly.

        All of these contemporary theories that humans can be coerced to be one way or another, regardless whether they emanate from the political Right (e.g. neoliberalism) or the political Left (e.g. progressivism), derive from the philosophy of Johann Gottlieb Fichte (1762-1814). As Michael Allen Gillespie explains in Nihilism Before Nietzsche, the project that Fichte embarked upon “is not merely a Cartesian technological project that seeks to master and transform nature but also a Rousseauian moral project that aims at the transfiguration of man himself.”

        Thus, “coercion may be employed to modify the behavior of individuals who are driven by caprice rather than by moral will.”

        Who were to be the arbiters of “moral will”? As Gillespie goes on to explain, “Fichte is ultimately convinced…the ruling class will be a noble cadre of scholars virtuously devoted to the cause of freedom.” Since then, Fichte’s new universal class of scholars has variously been conceived as Hegel’s civil servants, Marx’s proletariat, the Russian nihilists’ peasantry, WEB DuBois’ “the talented tenth,” right on down to the modern technocrats (which is where contemporary economists enter the picture).

        So, as Elinor Ostrom notes in Chapter 9 of Moral Sentiments and Material Interests http://ompldr.org/vOHU2cA , “Leviathan is alive and well in our policy textbooks. The state is viewed as a substitute for the shortcomings of individual behavior and the presumed failure of community. Somehow, the agents of the state are assumed to pay little attention to their own material self-interest when making official decisions and to know and seek ‘the public interest.’ ”

        Human beings are actually equipped with some sort of a sixth sense that allows them to see through all the sophistries and, despite all the smoke screens, detect free-riding. Humanoids have been playing these games for the past 2 million years, but on the local level in small hunter-gatherer groups. So in large societies with centralized authorities, the task becomes much more difficult. As Ostrom goes on to explain, “achieving some reliable information about the trustworthiness of others is crucial to this accomplishment. Consequently, institutions that enhance the level of information that participants obtain about one another is essential to increase the capacity of individuals to solve collective-action problems. Information rules are as important (or more important) in solving collective-action problems than payoff rules, but payoff rules have been the primary focus of a considerable percentage of public policy initiatives.”

        After free-riding is detected, then there have to be political institutions that allow the policy-makers to be held accountable by the people. The modern technocratic state, patterned on Fichte’s elitist idea of an universal ruling class, has in practice served as little more than a buffer to insulate our elected representatives from being held accountable by the people. The bureaucratic state is perhaps the mother of all bad government, as Hannah Arendt explains in “On Violence”:

        **quote**
        Today we ought to add the latest and perhaps most formidable form of such dominion: bureaucracy or the rule of an intricate system of bureaus in which no men, neither the one nor the best, neither the few nor the many, can be held responsible, and which could be properly called rule by Nobody. (If, in accord with traditional political thought, we identify tyranny as government that is not held to give account of itself, rule by Nobody is clearly the most tyrannical of all, since there is no one left who could even be asked to answer for what is being done. It is this state of affairs, making it impossible to localize responsibility and to identify the enemy, that is among the most potent causes of the current worldwide rebellious unrest, its chaotic nature, and its dangerous tendency to get out of control and to run amuck.)

        **end of quote**

  4. This analysis falls into the common trap of supposing that financial practitioners were ignorant to the risks involved. There were practitioners at every level, from the original mortgage brokers completely aware that they were lending money to borrowers who were not going to be able to repay it, to mortgage traders in banks securitizing those doomed mortgages, who could easily comprehend the what was going on. But as long as your competitors are doing it and everyone is making lots of money, who cares? Li’s much-maligned Gaussian copula function is a good example. Anyone with a bit of maths would have understood that the underlying assumptions of the function; normally distributed financial returns and constant correlations, were flimsy. Moreover, deriving a correlation parameter from past prices of products that are themselves just guesses of the correlations in question is insane. But who cares? A way to price hundreds of billions of dollars of paper has just landed in your lap as well as your competitors’. If you ignore it because of its obvious flaws, you lose market share and miss out of lots of money in the process.

    • George Balanchine

      Paul Davidson has an interesting criticism of Taleb.
      Davidson says that Taleb accepts the ergodic axiom for economics which means that Taleb believes that there is a probability distribution out there that will help us determine future events.
      Davidson along with Keynes points out that economics(the world) is not ergodic, that is we cannot use past events to find out probablity distributions for future events.
      This means that risk management of any kind, including Taleb’s, has not and will not work.

      Sincerely,
      George Balanchine

  5. The macro/external stuff up is gov guarantees, full stop.

    The micro stuff up is Why bonuses arent just say 3 yr locked scrip bonuses only to ensure people do things to the benefit of shareholders, not just themselves.

    People are basically innately selfish, hence if you can focus mgmt on risk and employees on long term returns the world/business environment would be a better place and things a bit more normal.

    Pie in the sky stuff I know.

    • 8mil said:

      People are basically innately selfish….

      No, only about 20 to 40% of any given population (it varies due to the influence of culture), and especially those who have been indoctrinated into neoclassical economics and taken it to heart.

      • No, only about 20 to 40% of any given population (it varies due to the influence of culture), and especially those who have been indoctrinated into neoclassical economics and taken it to heart.

        I don’t disagree with your position, but I was wondering if you had any actual sources to back up that 20-40% proportion ?

      • See Chapter 5 and Chapter 9 here:

        http://ompldr.org/vOHU2cA

        Quoting from Chapter 9:

        **quote**

        It is a well known fact in the experimental literature that in games like the trust game, there is always a 30-40 percentage of individuals who act in a purely egoistic way. This leaves 60 to 70 percent of the other individuals who tend to follow more complex strategies involving some levels of trust and reciprocity.

        **end of quote**

        Then there’s this from Amitai Etzioni’s The Moral Dimension:

        **quote**
        An empirical study of the educational effects of neoclassical teachings might well show that the students become somewhat more self-oriented…. Such effects are evident in a series of free-ride experiments conducted by Marwell and Ames (1981). In eleven out of twelve experimental runs most participants did not free ride and contributed from 40 percent to 60 percent of their resources to a public good. However, a group of economics graduate students contributed only an average of 20 percent. And while the other subjects were motivated by a strong sense of fairness, and a near unanimous definition of what it is, economics students refused to define the term, or gave very complex answers, and those who did respond stated that making little or no contribution was fair.

        Beyond the effects on students there are effects on the public mentality. Here, too, the prevailing economic approach to moral values tends to debase them….

        In short, because the neoclassical paradigm is part of the modern mentality, and not merely an academic field, it affects the way people see their world and themselves, and the way they behave….

        [I]f it is true that people do seek to balance their pleasures with moral considerations, and if they are taught, to the contrary, that they are “really” only out to maximize their pleasure (and all that follows, that people behave morally only as long as it pays, and so on), there is likely to be a negative, anti-moral effect….

        At the same time, one should not deny that pleasure and self-interest constitute a major motivating force, and—-in their place—-a legitimate one. Socio-economics is hence to view pleasure and self-interest within the broader context of human nature, society, and ultimate values, rather than either ignore the self-oriented force, or build a paradigm, theory, and morality focused entirely on self.

        **end of quote**

      • I think that % might be a tad higher in the finance word though boys. I’d be gobsmacked if it wasn’t in the 70s which is what l was referring to more so than including also the general public

  6. I like Godel’s theorem, but I’m not entirely convinced that this is the problem and that his lessons are particularly useful here. Godel was talking about formal systems of logic and mathematics, not about risk assessment. Well, yes, risk assessment in finance uses mathematics and logic, but it’s not a formal system and risks can be non-mathematical in nature. Eg, Financial Risks can be political, psychological, meteorological in nature, and a great many more no doubt as well.

    In the case of the GFC I think there was a lot mis-information around the quality of the mortgage assets being traded and perhaps also a will-full disregard for events of an outside-chance from happening. I’m sure that someone had asked what’s the counter-party risk of Lehman, for example, and assessed it wrongly in the face of incorrect information. So the perceived risk of a major financial institution defaulting was small so it was ignored, and many people lost money as a result. There perhaps were also assumptions in people’s risk assesment – eg, that liquid products would remain liquid. Well, I bet the liquidity did not remain undisturbed in RMBS shortly after the Lehman collapse, so lots of people were probably left holding what they did not want or tried to off-load it at extremely small prices. I have nfi if this happened btw, but I guess my point is that liquidity is a key part of risk assessment and it’s not a constant.

    In regards to a few other comments, I would say that models are very useful, but finance, economics and trust are facets of human psychology and so this would make an appropriate target for model inputs. Unfortunately, it’s not something we know that well, or at least not well enough to model accurately.

  7. To me, the statement “financial markets are full of people who understand the risk analytics and can exploit them” has a lot more explanatory power as to why the GFC happened than the statement, “They believed they had covered all the options that were possible, only to get a nasty surprise.”

  8. “Someday, we promise you, modern economists will be ranked below doctors who bled their patients to death and jungle tribes who threw maidens into volcanoes. They are quacks” (Bill Bonner – H/T MoneyMorning)

    • If that analogy was to ring true it would mean that doing nothing is better than letting economists anywhere near the economy.
      That is the reason why homeopathy was so effective compared to the bleeding treatment of the day. It wasn’t doing anything (except re-hydrating the patient) but that they weren’t being bled and the room was comparatively clean was a big improvement.
      Can anyone suggest the economic version of homeopathy?

    • It seems rather obvious to me that all this elaborate scheming by Thatcher, Blair and Brown and their neoliberal gurus (read orthodox economists) served one purpose and one purpose only, and that was to draw attention away from the obvious remedy for unaccountable government: a more virtuous and honest democracy. But in place of that, what they served up was dissembling on a grand scale; anti-democracy falsely packaged up as freedom and sold to a gullible and unsuspecting public.

      In effect, what they did was double down on selfishness (aka free markets).

  9. StroppyTheWonderDog

    “The point about measures such as scope and scale is that the point of perspective comes from outside the system. If Godel were a financial trader, he would no doubt agree that is essential.”

    If he were a real financial trader with that perspective, he would find a way to bet against the risks in the system. Or he would understand that the system would protect him precisely because pretty much everyone else was doing it.

    • Yes, there are always problems of recursion. In the end banning some of the meta money seems the only way.

  10. George Balanchine

    “why did the complex risk defrayal methods fail so completely during the global financial crisis?”

    They failed partly because the economic models they were based on rule out the possibility of economic crises.
    The other reason they failed is that “risk management” either internally or externally is not really possible. While interesting, Godel has nothing to do with this problem since mathematics and economics are entirely different domains of knowledge and have nothing to do with one another.
    Of course, if you don’t believe me, read the work of Paul Davidson on the use of the ergodic axiom in economics. Or Robert Skidelsky. Or Joan Robinson. Or John Maynard Keynes.

    Sincerely,
    George Balanchine

    P.S.
    Q: What were Kingsley Amis’ last words?
    A: “For Christ’s sake you bloody fool, get me a drink!”

  11. financial engineering SPREADS risk. It can never REDUCE or ELMINATE risk – at best it moves some or all risk from one party to another. The key problem is not a lack of an external measure (although that would have been useful) – its the idea that spreading risk widely across entities and far into the future somehow got rid of the problem – dumb dumb dumb.