Felix Salmon

Judging Greg Smith’s book by its cover

Felix Salmon
Sep 19, 2012 19:49 UTC

We don’t know much about the new book by Greg Smith, Why I Left Goldman Sachs. But we do know what its cover looks like. And there’s no mistaking the fact that the font on the cover of the book is very similar to the font used in the Goldman logo:

The font in question is Bodoni. There are hundreds of different flavors of Bodoni, but I asked the lovely Josh Turk at Reuters to try to recreate both the book cover and the Goldman logo using Bodoni Bold Condensed. There’s no painstaking work here, just typing the words on a colored background. Here’s the cobbled-together logo, on the left, and the real one, on the right:


And here’s the cobbled-together book cover, on the left, and, again, the real one on the right.


Obviously Grand Central, the publishers of this book, didn’t use exactly the same kind of Bodoni: just look at the difference in the Ws. But what’s really striking to me, here, is how little Grand Central is really trying, given how high-profile this book is, and given the fact that it reportedly cost them a $1.5 million advance to acquire.

I was talking about this on Twitter last week, and Dealbook’s Peter Lattman pointed out that there isn’t just a resemblance to the Goldman logo, there’s also a resemblance to Neil Fujita’s legendary cover for In Cold Blood.


Now this cover, like the Goldman logo, is all hand-lettered. It’s based on Bodoni, or something very similar, but it’s condensed the right way — by hand, meticulously, rather than by simply selecting “condensed” from a drop-down menu in Illustrator. Look at the way the lower serif of the n connects with the upper serif of the l, for instance, or the lovely Tr ligature, or even the way the “Cap” runs together in “Capote”.

One thing you’d think would be quite easy to replicate is the very tight leading — the fact that there’s almost no space between the horizontal lines. You see that in the Goldman logo, to the point at which the G and the S end up mushed together. So it would have been quite natural for the designer of the Smith book to have done the same.

But that didn’t happen: while the Smith book designer happily copied the Goldman font, she ignored the tight leading, with the result that the cover seems a bit loose and jumbled. And although there’s one ligature on the cover — a standard ft ligature in “Left” — the rest of the letterspacing also seems a bit careless, especially between the h and the y in “Why”.

All of which is to say that Greg Smith’s relationship to Goldman Sachs, and even to Truman Capote, can be seen in typography alone.

Goldman Sachs and Truman Capote sweat the details, and present their name in a carefully hand-drawn and fastidious way, calling on very talented and expensive designers to do so. Smith, by contrast, and/or his publisher, is happy with a rough-and-ready approximation: something which seems similar or good enough at first glance.

The designers of the Greg Smith book could have had real fun with this, if they really wanted to play on the Goldman logo. They could have used a white-on-blue color scheme, they could have chopped the serifs off the bottom of the letters, and — most obviously — they could have brought the “Smith” up so close to the “Greg” that the G and the S ended up smooshed together. Instead, the only connotation of sophistication in this cover comes from taking the words “I Left” and putting them in gold.

So if you want access to some of the smartest bankers in the world, go to Goldman Sachs. If you want to read a classic piece of book-length nonfiction, pick up In Cold Blood. Greg Smith, by contrast, never seems to have got very far at Goldman, and — despite the fact that I haven’t read it — I doubt very much that his book will still be in print in 47 years’ time, either.


This posting make you seem very superficial.

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Financial fiction

Felix Salmon
Jun 22, 2012 20:35 UTC

Near the beginning of Capital, the new novel from John Lanchester, we’re introduced to banker Roger Yount, and are treated to a wonderful three-page riff on the million-pound bonus he’s desperate to receive:

He wanted a million pounds because he had never earned it before and he felt it was his due and it was a proof of his masculine worth. But he also wanted it because he needed the money. The figure of £1,000,000 had started as a vague, semi-comic aspiration and had become an actual necessity.

Yount’s voice, as channeled by Lanchester, is one of the joys of this book: “Any flights would be taken business class, since Roger thought that the whole point of having money, if it had to be summed up in a single point, which it couldn’t, but if you had to, the whole point of having a bit of money was not to have to fly scum class”.

Lanchester is a real expert on banking and the global financial crisis: his book I.O.U. is a great one-stop guide to what went wrong. And having written that book, he had no need to try to explain the crisis all over again here. Instead, he has rolled out a much broader, novelistic canvas, stretching across creeds and classes and countries, which is a true pleasure to read, and which does an amazing job of evoking and showing what London has become. Anybody who loves London, or hates it, will love this book, and will find just as much detail in the descriptions of football agents and corner shops as there is on the trading floor.

Lanchester’s not the only Wall Street expert to have written a novel: The FT’s John Gapper has come out with one too. Called A Fatal Debt, and coming out on Tuesday, it’s a rollicking beach read, and loads of fun for anybody who prefers their bankers on the dead side. Gapper’s a friend, so I can’t claim to be objective here, but I devoured this one in no time. Lanchester’s book is long and complex and something to savor; Gapper’s is punchy and plot-driven and a guiltless pleasure.

Gapper’s book is set mostly in New York, and the Hamptons; I’m sure it’s going to be read around these parts a great deal over the next couple of months. It’s the perfect form of escapism for anybody with a summer place on the South Fork, especially if they have anything to do with finance. Which most of them do.

The financial thriller is becoming something of a genre these days: I also enjoyed The Fear Index, by Robert Harris, and Dead Bankers, by Philip Delves Broughton. It turns out that people who understand money also seem to be quite good at cunning and plot twists, a bit like mathematicians tend to be good musicians. And for those of us who read thousands of words of dry financial nonfiction every day, the opportunity to kick back with a book designed to be enjoyed, rather than something more didactic, is something to be savored and treasured. Now that we’re officially in summer, you can make some space for fiction. And you could do a lot worse than picking up any of these books.


“… and loads of fun for anybody who prefers their bankers on the dead side.”


“And for those of us who read thousands of words of dry financial nonfiction every day, the opportunity to kick back with a book designed to be enjoyed, rather than something more didactic, is something to be savored and treasured.”

Are each of your days like 40 hours long?

Let me add an old favorite – “Someone Else’s Money”, by Michael M. Thomas. Dated, but it’s in paperback and it’s got it all.

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The Fear Index

Felix Salmon
Jan 15, 2012 20:35 UTC

I tend to find fictionalizations of high finance disappointing. I wasn’t a huge fan of Margin Call: it seemed to me oversimplistic and often quite silly in its portrayal of a how a bank like Lehman Brothers operates. And Adam Haslett’s hugely ambitious novel Union Atlantic was worse. In both cases, a series of senior bankers behaved in ways that senior bankers simply wouldn’t ever behave in reality.

Robert Harris’s The Fear Index, however, is very different. For one thing, it’s not boring: it doesn’t allow financial exegesis to slow it down, and it’s as addictive as any thriller written. PIck this up on an airplane, and you won’t want to land. On top of that, it’s well written, to boot. I wouldn’t go so far as to call it literary, necessarily, but when our antihero, Alex Hoffmann, reaches up to touch “the hard puckered smile of his wound”, or when a key subplot is artfully introduced, early in the book, with the single word “again”, and then left to simmer for 150 pages before being properly picked up, you know you’re dealing with an author who relishes the craft of writing. Oh, and did I mention there’s even an autistic fund-of-funds manager named Ezra Klein?

For me, however, the greatest pleasure of this book is that it gets finance right. It’s set in the world of algorithmic hedge funds, and the whole thing takes place on May 6, 2010 — the day of the flash crash (and the UK general election). The details are specific, and correct — everything from the way that hedge fund managers sell their funds to investors, to the PhD snobbism at algo shops, to the income-tax rates on Switzerland-based hedgies, to the mechanics of the NBBO system and algorithmic e-mini orders during the flash crash. The thing that freaks out the managers at Hoffmann’s hedge fund is not that they’re losing money, but rather that they seem to be losing their delta hedge.

This is a thriller, of course, so there’s a quantum of what Harris calls “Gothic flights of fancy” in there as well. (“Briefly the knife trembled close to his face. ‘Es ist, was Sie sich wünschen,’ whispered Karp soothingly. It is what you desire.”) And the dystopian fear at the heart of the book is not new — it’s been a science-fiction staple for decades. But as Harris explains, reality itself has already become outlandish and scary in largely-invisible ways.

Harris throws an enormous number of torments at Hoffmann, his billionaire hedge fund manager, but the one that really sends him and his wife over the edge is when her gallerist manages to sell out her entire art show on its opening night, for the sum of $200,000. Now that’s what I call a rich-people problem: there’s some very dark satire, here, just beneath the fast-paced surface. I hope that Paul Greengrass manages to retain it, in the upcoming movie.


“Oh, and did I mention there’s even an autistic fund-of-funds manager named Ezra Klein?”

Any relation to the lobotomized blogger whose own contributions have become the weakest part of his WaPo empire?

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Did Michael Lewis libel Wing Chau?

Felix Salmon
Mar 1, 2011 03:45 UTC

Is this a case of reality copying satire? A couple of weeks ago, Michael Lewis caricatured the dissenters from the FCIC report:

Financial Crisis Cause No. 3: The Chinese

And then today, in his defamation lawsuit against Lewis, Wing Chau seems to imply that’s what Lewis actually thinks:

Wing Chau and his immediate family are Chinese immigrants. His father, Muk Loong Chau, fled Chairman Mao’s China in 1953 to make a better life for his family in America—to pursue the American dream. Mr. Chau was born in Hong Kong, where the family was waylaid for many year while awaiting a visa. Eventually, the family immigrated to Rhode Island, where his father took various jobs at Chinese restaurants, usually working six days per week.

Why is this in the lawsuit? As Nitasha Tiku notes, it has nothing to do with the case, and can only be there to make Lewis seem prejudiced against the Chinese.

Meanwhile, there’s all manner of wonderful stuff in the suit designed to make us prejudiced against Lewis:


I’m particularly fond of the BA in Art History (I have one myself) and the “family compound” (sadly not).

There’s lots more where that came from in the suit, which is particularly adept at using information from Lewis’s book to cast aspersions on its central character and, ultimately, on the book itself.

All of which is enough to make you want to dismiss the lawsuit as a very silly and opportunistic, if it weren’t for the fact that hidden on pages 15-18 of the 37-page complaint seems to be a pretty colorable case against Lewis and his publisher. (Steve Eisman is also a defendant, which I’m not so sure about.)

Wing Chau certainly comes off very badly in the book — in my own review, I said that Lewis “sets up a hapless fund manager named Wing Chau as a major villain”. It’s very easy to see that the reputational damage he says that he suffered as a result of the book’s publication is real. So the next question is: does the book portray him accurately? Or does it stray into defamatory fiction?

The book states that Chau “controlled roughly $15 billion, invested in nothing but CDOs backed by the triple-B tranche of a mortgage bond”, and told Eisman all manner of things about himself which few fund managers would ever admit to a perfect stranger, even if they were true. Chau says that he was invested in A-rated bonds as well as corporate and other non-mortgage debt; I believe him, although the complaint never quantifies what proportion of Chau’s CDOs were anything but BBB-rated mortgages. I can also believe that some of what Eisman says that Chau said was made up — although Bloomberg did find a second source confirming that Chau thanked Eisman for shorting the market, thereby providing more raw material, in the form of credit default swaps, for him to write.

I’ve suspected since March 1 of last year that although The Big Short is a spectacular book and a superlative piece of narrative financial journalism, Lewis was all too willing to simply accept whatever he was told by Eisman without checking his facts particularly assiduously. In the grand scheme of things, that doesn’t matter. The specifics of the allegations about Goldman Sachs and Wing Chau might not be spot-on, but the bigger picture is. Lewis’s readers weren’t misled about the financial crisis in general, or Eisman’s story.

But if Wing Chau can persuade a jury that specific factual allegations against him caused him significant damages, this could be a hard case for Lewis to win.

Lewis’s best defense, I suspect, will be that the fall-off in Chau’s business was inevitable, after the crisis broke, and that his dismal performance as one of the largest managers of subprime CDOs would have left him with precious little “reputation in the business community” either way. It’s entirely possible that Chau’s friends, being nice to him, have told him that he’s not the reason no one wants to invest with him, it’s the book. But there’s a good chance that they’d come up with some other excuse had Lewis not written The Big Short.

I suspect this case won’t ever go to jury: Chau doesn’t want to go through discovery, and no one wants to spend enormous sums of money on lawyers. So maybe a well-crafted complaint could get some kind of a payout for Chau quite quickly. But if he wants to fight this case all the way, he end up subjected to some highly embarrassing cross-examination.


Try this thought exercise: what will historians a hundred years or two from now say about the causes of the crisis?

I think there will be three turn-of-the-century trends assigned roughly equal weight: rampant mis-regulation and mis-manipulation (Fed-subsidized credit, government/GSE-subsidized mortgages, the quasi-official status of credit ratings), a short-termist fad in investment, and America’s illusion of invincibility.

And I’m quite sure that 2008 won’t be counted as the end of any of those three trends. Probably not even the apex.

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How AIG died

Felix Salmon
Feb 8, 2011 05:59 UTC

Many thanks to Roddy Boyd for sending me over e-galleys of his new book on the implosion of AIG, Fatal Risk. (If you want me to read a book — I’m looking at you, publishers — then sending it over in electronic form makes it much more likely I’ll do so. I would never have read Zero-Sum Game, for instance, Erika Olson’s insider account of the CME-CBOT merger, had she not sent it to my Kindle. But she did, and I did, and I’m happy I got to read it.)

Boyd’s book is as in-depth as any autopsy of AIG will ever be and it does presume a reasonably sophisticated grasp of finance on the part of the reader. That’s smart, on Boyd’s part: he knows who his audience is for this book.

Boyd’s definitely done his homework here: he seems to have talked to almost everybody who matters, with the possible exception of Martin Sullivan, the hapless AIG CEO who ends up bearing the lion’s share of the blame for what ultimately went wrong. Sullivan’s predecessor, Hank Greenberg, is deeply flawed, of course, in part because he insisted on singlehandedly and personally being the key risk-control mechanism for an enormous company which no one man could possibly oversee in detail and in part because the company he so assiduously built managed to fail so devastatingly the minute he left. (On top of that, of course, there’s the question of his various prosecutions; Boyd is sympathetic to Greenberg on that front and very harsh on Eliot Spitzer.)

Boyd’s case that the AIG implosion would never have happened had Greenberg stayed on as CEO can never be proven one way or the other. My suspicion is that AIG was so big and Greenberg was stretched so thin, that ultimately AIG was certain to fail in any case. But the incompetence of Greenberg’s lieutenants is quite astonishing: Boyd writes at one point that neither Stasia Kelly, the general counsel, nor CFO Steven Bensinger, nor CEO Martin Sullivan had ever even heard of the “credit support annex” which proved fatal to company, by forcing AIG to put up billions of dollars in collateral when the CDOs it insured fell in value. And at a later point, Sullivan is astonished by numbers which had been carefully explained to him the previous day by the notorious Joe Cassano.

Cassano is certainly a very large part of the reason why AIG failed — his headlong rush into mortgages was a move which was explicitly ruled out by both of his predecessors at AIGFP, for good reasons, and he took full advantage of the fact that his boss, Martin Sullivan, lacked any ability to understand what he was doing or to rein in his excesses.

But in reality it was Win Neuger, with his idiotic and devastating securities-lending transactions, who probably did more harm to AIG than any other individual. Matt Taibbi told the Neuger story in his own inimitable style in Griftopia, but Boyd provides chapter and verse for anybody who really wants to understand the details.

When AIG failed along with various monoline insurers, the lesson that many of us drew was that no company should ever use its triple-A rating as a business model. If your triple-A is necessary for you to continue to make money, then you shouldn’t really have a triple-A in the first place: it’s a rating which should be reserved only for companies which don’t need it.

What happened at AIG, along with the other monolines, is pretty simple: they started taking their triple-A for granted, like it was some kind of fact of nature rather than a hard-won award which could be removed at any minute. Whatever else you might say about Hank Greenberg, he always jealously guarded his triple-A. But when he went, so did that culture.

There are no corporates any more, which rely on their triple-A rating for profits: even Berkshire Hathaway has been downgraded. That’s good. But there are still sovereigns. The UK strikes me as a little Greenbergian: it’s making deep fiscal cuts now, in an attempt to ensure its triple-A is never taken away. The U.S., by contrast, is more reckless, a bit like AIG after Greenberg left — it’s going after growth, first and foremost, rather than concentrating on its debt ratios. That might well be the right decision to make — especially if the U.S. could live with its bonds carrying a little bit of credit risk. But it’s a decision which should very much be made consciously and I don’t think that anybody has really done that.


About the book ZERO-SUM GAME. It has its moments, but the author scraps up against a pet peeve of mine. She writes at one point that Chris Lown, a banker in the ICE ‘war room’ preparing their proposal for the CBOT board, was “one of the only people who got a bit of fresh air that night,” etc.

Okay, I get it. It got out of the suite just to ferry materials to and from the Kinko’s. But the expression “one of the only” is annoying. It means either “the only person who” or it means, “one of a small number.” But it doesn’t tell you which it means. Grrrr.

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Where’s today’s hellhound of Wall Street?

Felix Salmon
Oct 14, 2010 23:00 UTC

My review of Michael Perino’s new book about Ferdinand Pecora, The Hellhound of Wall Street, is up now chez B&N. I liked the book a lot, and learned a lot from it, and ultimately came away saddened that history can’t and won’t repeat itself this time round. In 1933, Pecora was the hero of the financial crisis: the man who brought the banksters to book. Today, there’s no such hero. And while Dodd-Frank and Basel III are all well and good, they’re not remotely as far-reaching and revolutionary as the Securities Act, and the Exchange Act, and the creation of entities like the SEC and the FDIC.

Of course, it’s thanks largely to Pecora that we don’t need anything so far-reaching and revolutionary. It’s great that Perino has rescued Pecora from the dusty reaches of history, and is showing what an aggressive prosecutorial lawyer can do, given subpoena power and the moral high ground. I’d love to see one of those in the Senate today, or even in an AG’s office somewhere, or at the SEC. But ever since Eliot Spitzer became governor of New York, that job has seemed to be vacant. It looks very much as though there will be precious few prosecutions coming out of this crisis. Unless, of course, I’m right about the degree to which the mortgage scandal could explode.


Acutally, midasw, the high point of Pecora’s examinations was during the Hoover administration. After the election, to be sure — after FDR was elected — but before he took office.

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The Big Short

Felix Salmon
Mar 15, 2010 16:35 UTC

After my review of Michael Lewis’s new book was posted on Friday, Sandrew asked for a bit more detail on this bit, about the people who shorted the subprime mortgage market:

What these men did was not “socially useless,” to quote the chairman of the UK’s Financial Services Authority, Lord Turner. It was worse than that: it was actively harmful, since they provided the fuel which kept the subprime mortgage furnace burning even when the country was running out of new junk mortgages to write. In most financial markets, bearish bets act as a dampener; in this one, they were a necessary part of the subprime-mortgage machine, and a Deutsche Bank mortgage trader named Greg Lippmann ended up making billions of dollars for his employer — not to mention a $50 million bonus for himself — by aggressively going out and finding fund managers to put on the short bets needed to keep the market ticking.

The point here is that credit bubbles, like all bubbles, feed on trading activity and upward momentum. If you look at the history of the subprime mortgage market, it started off small and then slowly sped up as Fannie and Freddie started accepting increasing amounts of subprime paper. Then banks started selling private-label subprime CDOs directly to investors, bypassing the GSEs; a lot of the profits in that activity came from taking the unattractive lowest-yielding tranches and insuring them with AIG.

Then, after AIG exited the market, everything should have ground to a halt. But it didn’t, because banks continued to build synthetic subprime CDOs out of the credit default swaps which were being bought by Greg Lippmann and others. The demand for those CDOs from investors like Wing Chau was enormous, and helped to ratify the valuations that everybody else was placing on their own subprime assets. Remember that this is a market with almost no pricing transparency in the secondary market: because all securitization deals are unique, the only way to get a feel for the health of the market is by looking at where primary deals are pricing. Whenever anybody said that the marks being put on subprime assets by banks and hedge funds were delusional, it was easy to point to the booming market in synthetic subprime CDOs to prove them wrong. No one, of course, remarked on the irony that the synthetic subprime CDO market was only booming because John Paulson and others were providing a huge amount of demand for bearish bets.

My review got quite a lot of attention elsewhere, too, largely because of the last line, where I call Lewis’s book “probably the single best piece of financial journalism ever written”. It is a very good book, but at the same time there’s a faintness to the praise. As I wrote back in 2002,

With the possible exception of Michael Lewis at the New York Times Magazine, the financial journalism which appears in the generalist press (John Cassidy in the New Yorker; Joseph Stiglitz in the New York Review of Books) aspires more to authoritativeness than it does to any kind of lasting style.

Lewis’s achievement with The Big Short is that he’s written a book that a huge number of people will love to read: it’s not just for finance geeks. It’s pretty much the first crisis book about which that can be said, because Lewis has expended enormous effort on the kind of things that most financial journalists consider optional extras: carefully-structured narrative, intimately-colored characters, beautifully-written prose.

The churlish pushback against Lewis’s book, then, is misplaced, especially because The Big Short is a book-length refutation of the notorious column that Lewis wrote in January 2007, where he called the subprime bears wimps, ninnies, and pointless skeptics. Lewis clearly did an enormous amount of research for this book, which is more detailed and more accurate than anything he’s written in his Bloomberg column or for a glossy Condé Nast magazine.

Of course, in any book it’s possible to find mistakes, but people like Michael Osinski should be careful about throwing stones: I’m not at all sure he’s right, for instance, that the subprime CDS market ever “overwhelmed the actual market in the underlying bonds”. For what it’s worth, my quibble with the Lewis book is when he starts talking about the ABX index as being indicative of prices more generally, a mistake which Gillian Tett also made multiple times in her book. But that really is only a quibble. The Big Short isn’t ambitious in the sense of trying to explain everything that happened over the course of the financial crisis, but it’s very ambitious in the sense of trying to get a great book out of the crisis — one which can compete not only with finance books but also with fiction and non-fiction books more generally. I just wish that someone other than Michael Lewis would share that ambition.


I’m about a third of the way through “TBS” and I have to say I’m nearly as angry as I was after 9/11. It’s clear there’s a huge gap between the average intelligent person and Wall Street. I could sense it while watching the committee hearings with Goldman Sachs yesterday. The people who defend these kind of instruments can’t possibly understand how ridiculous this appears to an intelligent person on the outside. There’s a danger: understanding something, or at least thinking you do, becomes the rationalization for it’s existence. It’s payday someday, folks. This is such a joke that people are actually rationalizing the existence of a market that existed only on the back of one that should have never existed because “that’s the way it works.” Shame on this country.

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Dead Bankers

Felix Salmon
Feb 16, 2010 17:53 UTC

I was off the grid for most of the long weekend, which allowed me to curl up with a pulpy thriller for the first time in many, many years. I’m by no means an expert on the genre, but if you’re a reader of this blog and you like such things then there’s a good chance that Dead Bankers, a novel by Philip Delves Broughton, might be exactly for you; there’s a paperback version here if you don’t have a Kindle.

The thing that makes this book so great to read right now is not the fact that it’s full of the usual thriller ingredients — glamorous protagonists, jet-set lifestyles, money and sex and death and all that. Rather, it’s the thrill of seeing the whole financial crisis fictionalized, with thinly-veiled real-world figures (Hank Paulson, Steve Schwarzman, Nat Rothschild, Chris Hohn, Henry Kravis, Roman Abramovich) being caught up in intrigue and murder and blackmail for stakes in the billions of dollars. I don’t want to give too much away, but suffice to say that no matter how bad your view of these figures is right now, the chances are that Broughton’s is much, much worse. And that the walk-on role given Schwarzman’s crab claws is particularly delicious.

If anything, the problem with this book is that it’s almost got too much real-world material in it: it’s harder to forgive a couple of the more extreme financial contrivances when you know that the author went to Harvard Business School and knows his material so well. But there’s no doubt that the book is fun to read and extremely timely. If you’ve ever fantasized about what would happen if the people who helped create the global financial crisis started getting serially murdered, you should give this book a go.


Rad Dead Bankers last night. Definitively a page turner; I finished reading at 1 am.

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The Flaw of Averages

Felix Salmon
Aug 23, 2009 04:11 UTC

I’m not generally a fan of management books, maybe because I’m not a manager. So it’s probably just as well that I didn’t realize that The Flaw of Averages, by Sam Savage, was a management book before I started reading it. The highest praise I can give it is that I finished reading it — all the way through — which is something I don’t think I’ve ever done with a management book. Savage is a clear and gifted writer, which helps, and I’m interested in the subject matter, which also helps.

But there was something else which kept me reading: I was waiting for the other shoe to drop, and it never did. The basic thesis of The Flaw of Averages is not only true but mathematically provable: when you’re dealing with probability distributions rather than certainties, you can find yourself making all manner of horrible and costly errors if you try to boil those probability distributions down to a single number like an average. Instead, contemporary software, much of it based on Savage’s own research and development, allows you to create and manipulate those distributions directly, with much more useful results.

Savage advocates that companies create a new position, the Chief Probability Officer, charged with coordinating the institutional knowledge about probability distributions. He writes, in what might be the nub of the whole book:

Managers at many levels are just bursting with probabilistic knowledge, which if properly channeled can be put to good use.

Of course, the question of how to put the knowledge of lower-level managers to good use is not a question confined to probability distributions: really, it’s the central question of all management theory. But substantially all of this book deals with the question of how best to deal with probability distributions; there’s nothing at all on how to smell them to see if they make any sense, or how to judge how accurate they are.

Most startlingly of all, there’s no discussion of what probability is. One of my favorite parts of Riccardo Rebonato’s magnificent book Plight of the Fortune Tellers is chapter 3, “thinking about probabilities”. He makes the hugely important distinction: on the one hand there’s frequentist probability, where you can run the same experiment thousands of times to see what different results occur. On the other hand there’s subjective probability: if I ask what the probability is that oil will hit $100 per barrel in the next five years, you can’t do that.

Many people, Savage included, love to run Monte Carlo simulations in order to try to reduce subjective probability to frequentist probability, but there’s a category error going on whenever that happens, which is one reason that financial instruments designed by running Monte Carlo simulations blew up so spectacularly during this financial crisis. Monte Carlo simulations are very bad at showing the risk of something unprecedented happening, but as Nassim Taleb loves to point out, it’s the unprecedented events — the black swans — which tend to be crucially important.

On page 291 of his book, Savage prints an admittedly hypothetical distribution of future sea levels. He then goes on to explain why the distribution is oversimplified, and why we can’t trust it in its initial oversimplified form. But the fact is that his base-case scenario, the place where he starts his analysis, is a thin-tailed normal distribution, with the chance of sea levels rising in future being exactly the same as the chance that they will fall.

I just can’t believe that that kind of normal distribution is ever a useful place to start when thinking about something like climate change — the subject of the chapter at hand. The chances of sea levels falling from their current level are tiny — much lower than 50%. And the histogram going out is very bumpy indeed: to a first approximation, either Greenland and the west Antarctic ice sheet melt into the sea, or they don’t. Tails don’t get much fatter than this one.

But this whole book reads as though it was written in what Taleb calls “mediocristan” as opposed to the real world of “extremistan”. Tails are thin; Black and Scholes and Merton and Markowitz are heroes; probability distributions can be modeled and tamed and understood on a seat-of-the-pants level.

It’s true that the world of The Flaw of Averages is better than the world we’re just emerging from, where things like value-at-risk and correlation were disastrously boiled down to single numbers. But I’m still not sure I want to live in Savage’s world: it seems to me to be lacking a healthy dose of fear of the unknown. Quite the opposite, in fact: large chunks of the book are devoted to the riches that can be struck by identifying “real options” and buying them on the cheap from people who, looking only at averages, might overlook a lot of option value.

My fear is that if Savage’s souped-up Excel spreadsheets catch on, the corporate world will fall into the overconfidence trap which did for the financial world during the Great Moderation. Savage’s statistical distributions are extremely powerful tools, both in terms of identifying profitable opportunities and in terms of avoiding massive potential downside. But if companies become particularly adept at avoiding crashes, then that’s a recipe for yet another Minsky bubble. The fewer corporate disasters we see, the more risk and leverage that companies will feel comfortable taking on, and the more likely it is that another system-wide crash will occur.

Savage’s techniques are very good at discovering existing correlations which might not be immediately visible to senior management. But they’re useless at discovering correlations which were never significant in the past but which suddenly and terrifyingly go to 1 in the future when a Black Swan arrives.

If we all take Savage’s advice, we’ll weather most storms much better than we do right now. But I fear we’ll fare even worse in the event that a hurricane hits.

Update: Savage responds:

I believe in Black Swan thinking whole heartedly, but have been amazed to discover that most of my students (both university and executive) don’t even grasp the concept of a distribution in the first place. I also agree that any technology can lull people into a sense of security, but distributions of any kind are not as bad in this regard as single numbers. And my hope is that shaking the ladder in any manner will encourage people to stop fixating on the right answer, and start thinking about the right question, which is the proper defense against the black swan.

Actually one of my favorite interactive simulation demonstrations is black swanish, and sharply contrasts the Right Answer and Right Question schools. I didn’t think I could do it convincingly in the book because it is like writing about what it feels like to ride a bicycle, but I will try here. It involves picking a portfolio of petroleum prospects (like the Shell model), where one of the projects (site A) is a very attractive natural gas field, but is in a politically unstable part of the world, and there is a chance it could blow up politically.

Right Answer approach for dealing with the board of directors:

Ladies and gentlemen, we need to estimate the probability of an overthrow at our favorite site A, so we can chose an optimal portfolio that protects us in this event.

A committee is formed and after months of discussion it arrives at a 15% probability. Yes, there is a reasonable chance the place will blow up (lets call it a grey swan), but It is ridiculous to think you could estimate the probability with the accuracy implied by “15%” This analysis would rightfully deserve the wrath of Taleb.

“Right Question” approach:

We plug probabilities of overthrow ranging from 0 to 100% into an interactive simulation. As soon as a probability is plugged in, one thousand trials are run for each of 100 potential portfolios, nearly instantaneously. As we do this we observe the shape of the galaxy of portfolios in risk return space being deformed by probabilistic forces. We also notice that for all probabilities ranging between 3% and 97% that a few portfolios stay on the efficient frontier. These portfolios all contain both site A, and a less attractive site B, which is an alternate supply to the same market. Thus if A blows up, the price of gas goes up and B becomes a gold mine. This leads to the right question for the board of directors.

Ladies and gentlemen, do we hedge site A with site B? We are having an up or down vote in five minutes.

Well now you can see why I didn’t write about it, but if you ever have time for a webex, I find the demonstration dramatic, because I had no idea that the hedge of A with B would be optimal for such a huge range of probabilities.


Sam Savage’s book is great. I work with a bunch of very intelligent, highly educated people in a very quantitative field (investment management) – and yet, for all the sophisticated analysis we apply – the flaw of averages lurks everywhere and crops up in the most seemingly benign fashion and impacts decision-making all the time. Fixating on ‘black swans’ is all the rage these days, but let’s not forget to tie our shoe-laces.

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