Category Archives: The Wilmott Magazine

My published (or soon to be published) column pieces in The Wilmott Magazine

Risk – Wiley FinCAD Webinar

This post is an edited version of my responses in a Webinar panel-discussion organized by Wiley-Finance and FinCAD. The freely available Webcast is linked in the post, and contains responses from the other participantsPaul Wilmott and Espen Huag. An expanded version of this post may later appear as an article in the Wilmott Magazine.

What is Risk?

When we use the word Risk in normal conversation, it has a negative connotationrisk of getting hit by a car, for instance; but not the risk of winning a lottery. In finance, risk is both positive and negative. At times, you want the exposure to a certain kind of risk to counterbalance some other exposure; at times, you are looking for the returns associated with a certain risk. Risk, in this context, is almost identical to the mathematical concept of probability.

But even in finance, you have one kind of risk that is always negativeit is Operational Risk. My professional interest right now is in minimizing the operational risk associated with trading and computational platforms.

How do you measure Risk?

Measuring risk ultimately boils down to estimating the probability of a loss as a function of somethingtypically the intensity of the loss and time. So it’s like askingWhat’s the probability of losing a million dollars or two million dollars tomorrow or the day after?

The question whether we can measure risk is another way of asking whether we can figure out this probability function. In certain cases, we believe we canin Market Risk, for instance, we have very good models for this function. Credit Risk is different storyalthough we thought we could measure it, we learned the hard way that we probably could not.

The question how effective the measure is, is, in my view, like asking ourselves, “What do we do with a probability number?” If I do a fancy calculation and tell you that you have 27.3% probability of losing one million tomorrow, what do you do with that piece of information? Probability has a reasonable meaning only a statistical sense, in high-frequency events or large ensembles. Risk events, almost by definition, are low-frequency events and a probability number may have only limited practical use. But as a pricing tool, accurate probability is great, especially when you price instruments with deep market liquidity.

Innovation in Risk Management.

Innovation in Risk comes in two flavorsone is on the risk taking side, which is in pricing, warehousing risk and so on. On this front, we do it well, or at least we think we are doing it well, and innovation in pricing and modeling is active. The flip side of it is, of course, risk management. Here, I think innovation lags actually behind catastrophic events. Once we have a financial crisis, for instance, we do a post-mortem, figure out what went wrong and try to implement safety guards. But the next failure, of course, is going to come from some other, totally, unexpected angle.

What is the role of Risk Management in a bank?

Risk taking and risk management are two aspects of a bank’s day-to-day business. These two aspects seem in conflict with each other, but the conflict is no accident. It is through fine-tuning this conflict that a bank implements its risk appetite. It is like a dynamic equilibrium that can be tweaked as desired.

What is the role of vendors?

In my experience, vendors seem to influence the processes rather than the methodologies of risk management, and indeed of modeling. A vended system, however customizable it may be, comes with its own assumptions about the workflow, lifecycle management etc. The processes built around the system will have to adapt to these assumptions. This is not a bad thing. At the very least, popular vended systems serve to standardize risk management practices.

Risk: Interpretation, Innovation and Implementation

A Wiley Global Finance roundtable with Paul Wilmott

Featuring Paul Wilmott, Espen Haug and Manoj Thulasidas


How do you identify, measure and model risk, and more importantly, what changes need to be implemented to improve the long-term profitability and sustainability of our financial institutions? Take a unique opportunity to join globally recognised and respected experts in the field, Paul Wilmott, Espen Haug and Manoj Thulasidas in a free, one hour online roundtable discussion to debate the key issues and to find answers to questions to improve financial risk modelling.

Join our experts as they address these fundamental financial risk questions:

  • What is risk?
  • How do we measure and quantify risk in quantitative finance? Is this effective?
  • Is it possible to model risk?
  • Define innovation in risk management. Where does it take place? Where should it take place?
  • How do new ideas see the light of day? How are they applied to the industry, and how should they be applied?
  • How is risk management implemented in modern investment banking? Is there a better way?

Our panel of internationally respected experts include Dr Paul Wilmott, founder of the prestigious Certificate in Quantitative Finance (CQF) and, Editor-in-Chief of Wilmott Magazine, and author of highly acclaimed books including the best-selling Paul Wilmott On Quantitative Finance; Dr Espen Gaarder Haug who has more than 20 years of experience in Derivatives research and trading and is author of The Complete Guide of Option Pricing Formulas and Derivatives: Models on Models; and Dr Manoj Thulasidas, a physicist-turned-quant who works as a senior quantitative professional at Standard Chartered Bank in Singapore and is author of Principles of Quantitative Development.

This debate will be critical for all chief risk officers, credit and market risk managers, asset liability managers, financial engineers, front office traders, risk analysts, quants and academics.

Physics vs. Finance

Despite the richness that mathematics imparts to life, it remains a hated and difficult subject to many. I feel that the difficulty stems from the early and often permanent disconnect between math and reality. It is hard to memorize that the reciprocals of bigger numbers are smaller, while it is fun to figure out that if you had more people sharing a pizza, you get a smaller slice. Figuring out is fun, memorizingnot so much. Mathematics, being a formal representation of the patterns in reality, doesn’t put too much emphasis on the figuring out part, and it is plain lost on many. To repeat that statement with mathematical precisionmath is syntactically rich and rigorous, but semantically weak. Syntax can build on itself, and often shake off its semantic riders like an unruly horse. Worse, it can metamorphose into different semantic forms that look vastly different from one another. It takes a student a few years to notice that complex numbers, vector algebra, coordinate geometry, linear algebra and trigonometry are all essentially different syntactical descriptions of Euclidean geometry. Those who excel in mathematics are, I presume, the ones who have developed their own semantic perspectives to rein in the seemingly wild syntactical beast.

Physics also can provide beautiful semantic contexts to the empty formalisms of advanced mathematics. Look at Minkowski space and Riemannian geometry, for instance, and how Einstein turned them into descriptions of our perceived reality. In addition to providing semantics to mathematical formalism, science also promotes a worldview based on critical thinking and a ferociously scrupulous scientific integrity. It is an attitude of examining one’s conclusions, assumptions and hypotheses mercilessly to convince oneself that nothing has been overlooked. Nowhere is this nitpicking obsession more evident than in experimental physics. Physicists report their measurements with two sets of errorsa statistical error representing the fact that they have made only a finite number of observations, and a systematic error that is supposed to account for the inaccuracies in methodology, assumptions etc.

We may find it interesting to look at the counterpart of this scientific integrity in our neck of the woods — quantitative finance, which decorates the syntactical edifice of stochastic calculus with dollar-and-cents semantics, of a kind that ends up in annual reports and generates performance bonuses. One might even say that it has a profound impact on the global economy as a whole. Given this impact, how do we assign errors and confidence levels to our results? To illustrate it with an example, when a trading system reports the P/L of a trade as, say, seven million, is it $7,000,000 +/- $5,000,000 or is it $7,000, 000 +/- $5000? The latter, clearly, holds more value for the financial institution and should be rewarded more than the former. We are aware of it. We estimate the errors in terms of the volatility and sensitivities of the returns and apply P/L reserves. But how do we handle other systematic errors? How do we measure the impact of our assumptions on market liquidity, information symmetry etc., and assign dollar values to the resulting errors? If we had been scrupulous about error propagations of this, perhaps the financial crisis of 2008 would not have come about.

Although mathematicians are, in general, free of such critical self-doubts as physicistsprecisely because of a total disconnect between their syntactical wizardry and its semantic contexts, in my opinion — there are some who take the validity of their assumptions almost too seriously. I remember this professor of mine who taught us mathematical induction. After proving some minor theorem using it on the blackboard (yes it was before the era of whiteboards), he asked us whether he had proved it. We said, sure, he had done it right front of us. He then said, “Ah, but you should ask yourselves if mathematical induction is right.” If I think of him as a great mathematician, it is perhaps only because of the common romantic fancy of ours that glorifies our past teachers. But I am fairly certain that the recognition of the possible fallacy in my glorification is a direct result of the seeds he planted with his statement.

My professor may have taken this self-doubt business too far; it is perhaps not healthy or practical to question the very backdrop of our rationality and logic. What is more important is to ensure the sanity of the results we arrive at, employing the formidable syntactical machinery at our disposal. The only way to maintain an attitude of healthy self-doubt and the consequent sanity checks is to jealously guard the connection between the patterns of reality and the formalisms in mathematics. And that, in my opinion, would be the right way to develop a love for math as well.

Math and Patterns

Most kids love patterns. Math is just patterns. So is life. Math, therefore, is merely a formal way of describing life, or at least the patterns we encounter in life. If the connection between life, patterns and math can be maintained, it follows that kids should love math. And love of math should generate an analytic ability (or what I would call a mathematical ability) to understand and do most things well. For instance, I wrote of a connectionbetweenthree things a couple of sentences ago. I know that it has to be bad English because I see three vertices of a triangle and then one connection doesn’t make sense. A good writer would probably put it better instinctively. A mathematical writer like me would realize that the wordbetweenis good enough in this contextthe subliminal jar on your sense of grammar that it creates can be compensated for or ignored in casual writing. I wouldn’t leave it standing in a book or a published column (except this one because I want to highlight it.)

My point is that it is my love for math that lets me do a large number of things fairly well. As a writer, for instance, I have done rather well. But I attribute my success to a certain mathematical ability rather than literary talent. I would never start a book with something like, “It was the best of times, it was the worst of times.As an opening sentence, by all the mathematical rules of writing I have formulated for myself, this one just doesn’t measure up. Yet we all know that Dickens’s opening, following no rules of mine, is perhaps the best in English literature. I will probably cook up something similar someday because I see how it summarizes the book, and highlights the disparity between the haves and the have-nots mirrored in the contrasting lead characters and so on. In other words, I see how it works and may assimilate it into my cookbook of rules (if I can ever figure out how), and the process of assimilation is mathematical in nature, especially when it is a conscious effort. Similar fuzzy rule-based approaches can help you be a reasonably clever artist, employee, manager or anything that you set your sights on, which is why I once bragged to my wife that I could learn Indian classical music despite the fact that I am practically tone-deaf.

So loving math is a probably a good thing, in spite of its apparent disadvantage vis-a-vis cheerleaders. But I am yet to address my central themehow do we actively encourage and develop a love for math among the next generation? I am not talking about making people good at math; I’m not concerned with teaching techniques per se. I think Singapore already does a good job with that. But to get people to like math the same way they like, say, their music or cars or cigarettes or football takes a bit more imagination. I think we can accomplish it by keeping the underlying patterns on the foreground. So instead of telling my children that 1/4 is bigger than 1/6 because 4 is smaller than 6, I say to them, “You order one pizza for some kids. Do you think each will get more if we had four kids or six kids sharing it?”

From my earlier example on geographic distances and degrees, I fancy my daughter will one day figure out that each degree (or about 100kmcorrected by 5% and 6%) means four minutes of jet lag. She might even wonder why 60 appears in degrees and minutes and seconds, and learn something about number system basis and so on. Mathematics really does lead to a richer perspective on life. All it takes on our part is perhaps only to share the pleasure of enjoying this richness. At least, that’s my hope.

Love of Math

If you love math, you are a geekwith stock options in your future, but no cheerleaders. So getting a child to love mathematics is a questionable giftare we really doing them a favor? Recently, a highly placed friend of mine asked me to look into itnot merely as getting a couple of kids interested in math, but as a general educational effort in the country. Once it becomes a general phenomenon, math whizkids might enjoy the same level of social acceptance and popularity as, say, athletes and rock stars. Wishful thinking? May be

I was always among people who liked math. I remember my high school days where one of my friends would do the long multiplication and division during physics experiments, while I would team up with another friend to look up logarithms and try to beat the first dude, who almost always won. It didn’t really matter who won; the mere fact that we would device games like that as teenagers perhaps portended a cheerleader-less future. As it turned out, the long-multiplication guy grew up to be a highly placed banker in the Middle East, no doubt thanks to his talents not of the cheerleader-phobic, math-phelic kind.

When I moved to IIT, this mathematical geekiness reached a whole new level. Even among the general geekiness that permeated the IIT air, I remember a couple of guys who stood out. There wasDeviouswho also had the dubious honor of introducing me to my virgin Kingfisher, and “Painwould drawl a very painedObviously Yaar!” when we, the lesser geeks, failed to readily follow a his particular line of mathematical acrobatics.

All of us had a love for math. But, where did it come from? And how in the world would I make it a general educational tool? Imparting the love math to one kid is not too difficult; you just make it fun. The other day when I was driving around with my daughter, she described some shape (actually the bump on her grandmother’s forehead) as half-a-ball. I told her that it was actually a hemisphere. Then I highlighted to her that we were going to the southern hemisphere (New Zealand) for our vacation the next day, on the other side of the globe compared to Europe, which was why it was summer there. And finally, I told her Singapore was on the equator. My daughter likes to correct people, so she said, no, it wasn’t. I told her that we were about 0.8 degrees to the north of the equator (I hope I was right), and saw my opening. I asked her what the circumference of a circle was, and told her that the radius of the earth was about 6000km, and worked out that we were about 80km to the north of the equator, which was nothing compared to 36,000km great circle around the earth. Then we worked out that we made a 5% approximation on the value of pi, so the correct number was about 84km. I could have told her we made another 6% approximation on the radius, the number would be more like 90km. It was fun for her to work out these things. I fancy her love for math has been augmented a bit.

Photo by Dylan231

In Our Defense

The financial crisis was a veritable gold mine for columnists like me. I, for one, published at least five articles on the subject, including its causes, the lessons learned, and, most self-deprecating of all, our excesses that contributed to it.

Looking back at these writings of mine, I feel as though I may have been a bit unfair on us. I did try to blunt my accusations of avarice (and perhaps decadence) by pointing out that it was the general air of insatiable greed of the era that we live in that spawned the obscenities and the likes of Madoff. But I did concede the existence of a higher level of greed (or, more to the point, a more sated kind of greed) among us bankers and quantitative professionals. I am not recanting my words in this piece now, but I want to point out another aspect, a justification if not an absolution.

Why would I want to defend bonuses and other excesses when another wave of public hatred is washing over the global corporations, thanks to the potentially unstoppable oil spill? Well, I guess I am a sucker for lost causes, much like Rhett Butler, as our quant way of tranquil life with insane bonuses is all but gone with the wind now. Unlike Mr. Butler, however, I have to battle and debunk my own arguments presented here previously.

One of the arguments that I wanted to poke holes in was the fair compensation angle. It was argued in our circles that the fat paycheck was merely an adequate compensation for the long hours of hard work that people in our line of work put in. I quashed it, I think, by pointing out other thankless professions where people work harder and longer with no rewards to write home about. Hard work has no correlation with what one is entitled to. The second argument that I made fun of was the ubiquitoustalent” angle. At the height of the financial crisis, it was easy to laugh off the talent argument. Besides, there was little demand for the talent and a lot of supply, so that the basic principle of economics could apply, as our cover story shows in this issue.

Of all the arguments for large compensation packages, the most convincing one was the profit-sharing one. When the top talents take huge risks and generate profit, they need to be given a fair share of the loot. Otherwise, where is the incentive to generate even more profits? This argument lost a bit of its bite when the negative profits (by which I indeed mean losses) needed to be subsidized. This whole saga reminded me of something that Scott Adams once said of risk takers. He said that risk takers, by definition, often fail. So do morons. In practice, it is hard to tell them apart. Should the morons reap handsome rewards? That is the question.

Having said all this in my previous articles, now it is time to find some arguments in our defense. I left out one important argument in my previous columns because it did not support my general thesisthat the generous bonuses were not all that justifiable. Now that I have switched allegiance to the lost cause, allow me to present it as forcefully as I can. In order to see compensation packages and performance bonuses in a different light, we first look at any traditional brick-and-mortar company. Let’s consider a hardware manufacturer, for instance. Suppose this hardware shop of ours does extremely well one year. What does it do with the profit? Sure, the shareholders take a healthy bite out of it in terms of dividends. The employees get decent bonuses, hopefully. But what do we do to ensure continued profitability?

We could perhaps see employee bonuses as an investment in future profitability. But the real investment in this case is much more physical and tangible than that. We could invest in hardware manufacturing machinery and technology improving the productivity for years to come. We could even invest in research and development, if we subscribe to a longer temporal horizon.

Looking along these lines, we might ask ourselves what the corresponding investment would be for a financial institution. How exactly do we reinvest so that we can reap benefits in the future?

We can think of better buildings, computer and software technologies etc. But given the scale of the profits involved, and the cost and benefit of these incremental improvements, these investments don’t measure up. Somehow, the impact of these tiny investments is not as impressive in the performance of a financial institution compared to a brick-and-mortar company. The reason behind this phenomenon is that thehardwarewe are dealing with (in the case of a financial institution) is really human resourcespeople — you and me. So the only sensible reinvestment option is in people.

So we come to the next questionhow do we invest in people? We could use any number of euphemistic epithets, but at the end of the day, it is the bottom line that counts. We invest in people by rewarding them. Monetarily. Money talks. We can dress it up by saying that we are rewarding performance, sharing profits, retaining talents etc. But ultimately, it all boils down to ensuring future productivity, much like our hardware shop buying a fancy new piece of equipment.

Now the last question has to be asked. Who is doing the investing? Who benefits when the productivity (whether current or future) goes up? The answer may seem too obvious at first glanceit is clearly the shareholders, the owners of the financial institution who will benefit. But nothing is black and white in the murky world of global finance. The shareholders are not merely a bunch of people holding a piece of paper attesting their ownership. There are institutional investors, who mostly work for other financial institutions. They are people who move large pots of money from pension funds and bank deposits and such. In other words, it is the common man’s nest egg, whether or not explicitly linked to equities, that buys and sells the shares of large public companies. And it is the common man who benefits from the productivity improvements brought about by investments such as technology purchases or bonus payouts. At least, that is the theory.

This distributed ownership, the hallmark of capitalism, raises some interesting questions, I think. When a large oil company drills an unstoppable hole in the seabed, we find it easy to direct our ire at its executives, looking at their swanky jets and other unconscionable luxuries they allow themselves. Aren’t we conveniently forgetting the fact that all of us own a piece of the company? When the elected government of a democratic nation declares war on another country and kills a million people (speaking hypothetically, of course), should the culpa be confined to the presidents and generals, or should it percolate down to the masses that directly or indirectly delegated and entrusted their collective power?

More to the point, when a bank doles out huge bonuses, isn’t it a reflection of what all of us demand in return for our little investments? Viewed in this light, is it wrong that the taxpayers ultimately had to pick up the tab when everything went south? I rest my case.

Money — Love it or Hate it

Whatever its raison-d’etre may be, there is a need for more, and an unquenchable greed. And paradoxically, if you want to try to quench a bit of your greed, the best way to do it is to fan the greed in others. This is why the email scams (you know, the Nigerian banker requesting your help in moving $25 million of unclaimed inheritance, or the Spanish lottery eager to give you 67 million Euros) still hold a fascination for us, even when we know that we will never fall for it.

There is only a thin blurry line between the schemes that thrive on other people’s greed and confidence jobs. If you can come up with a scheme that makes money for others, and stay legal (if not moral), then you will make yourself very rich. We see it most directly in the finance and investment industry, but it is much more widespread than that. We can see that even education, traditionally considered a higher pursuit, is indeed an investment against future earnings. Viewed in that light, you will understand the correlation between the tuition fees at various schools and the salaries their graduates command.

When I started writing this column, I thought I was making up this new field called the Philosophy of Money (which, hopefully, somebody would name after me), but then I read up something on the philosophy of mind by John Searle. It turned out that there was nothing patentable in this idea, nor any cash to be made, sadly. Money comes under the umbrella of objective social realities that are quite unreal. In his exposition of the construction of social reality, Searle points out that when they give us a piece of paper and say that it is legal tender, they are actually constructing money by that statement. It is not a statement about its attribute or characteristics (likeThis is a glass of water”) so much as a statement of intentionality that makes something what it is (likeYou are my hero”). The difference between my being a hero (perhaps only to my six-year-old) and money being money is that the latter is socially accepted, and it is as objective a reality as any.

I conclude this article with the nagging suspicion that I may not have argued my point well enough. I started it with the premise that money is an unreal meta-thing, and wound up asserting its objective reality. This ambivalence of mine may be a reflection of our collective love-hate relationship with moneyperhaps not such a bad way to end this column after all.

Photo by 401(K) 2013

Money — Why do We Crave it?

Given that the investment value is also measured and returned in terms of money, we get the notion of compound interest and “putting money to work.” Those who have money demand returns based on the investment risk they are willing to assume. And the role of modern financial system becomes one of balancing this risk-reward equation. Finance professionals focus on the investment value of money to make oodles of it. It not so much that they take your money as deposits, lend it out as loans, and earn the spread. Those simple times are gone for good. The banks make use of the fact that investors demand the highest possible return for the lowest possible risk. Any opportunity to push this risk-reward envelope is a profit potential. Когда они зарабатывают деньги для вас,,en,они требуют свою компенсацию, и вы счастливы заплатить ее,,en,Поместите это так,,en,инвестиции звучат как позитивная концепция,,en,который это,,en,в нашем нынешнем образе мышления,,en,Мы можем легко сделать это негативным, представив спрос на инвестиционную ценность денег как жадность.,,en,Из этого следует, что все мы жадные,,en,и что именно наша жадность питает безумные компенсационные пакеты руководителей высшего звена,,en,Жадность также способствует мошенничеству,,en,схемы Понзи и Пирамиды,,en,На самом деле,,en,любое твое сильное чувство может быть куплено и продано для личной выгоды других,,en,Это может быть ваша искренняя симпатия к жертвам цунами или землетрясения,,en,ваше вуайеристское отвращение к пекадильям икон или президентов по гольфу,,en,благотворительные чувства к пациентам с почками,,en, they demand their compensation and you are happy to pay it.

Put it that way, investment sounds like a positive concept, which it is, in our current mode of thinking. We can easily make it a negative thing by portraying the demand for the investment value of money as greed. It then follows that all of us are greedy, and that it is our greed that fuels the insane compensation packages of top-level executives. Greed also fuels fraud – ponzi and pyramid schemes.

Indeed, any kind of strong feeling that you have can be bought and sold for personal gain of others. It may be your genuine sympathy for the Tsunami or earthquake victims, your voyeuristic disgust at the peccadilloes of golf icons or presidents, charitable feeling toward kidney patients of whatever. И способ, которым деньги сделаны из ваших чувств, может быть не очевиден вообще,,en,Просмотр новостей на пять минут дольше, чем обычно, из-за стихийного бедствия может принести дополнительную выгоду казне сети,,en,Но из всех человеческих слабостей можно заработать на,,en,самый простой это жадность,,en,Я могу ошибаться,,en,это может быть та слабость, которая породила самую старую профессию,,en,Но я думаю, что профессия, основанная на прибыльной слабости жадности, не так уж и далеко позади,,en,Если мы хотим использовать жадность других людей,,en,первое, что нужно спросить себя, это,,en,зачем нам деньги,,en,учитывая, что это мета-сущность,,en,Я знаю,,en,нам всем нужны деньги, чтобы жить,,en,Но я не говорю о необходимости части,,en,Предполагая, что необходимая часть заботится о,,en,мы все еще хотим большего,,en,Зачем,,en. Watching the news five minutes longer than usual because of a natural disaster may bring extra fortune to the network’s coffers. But of all the human frailties one can make money out of, the easiest is greed, I think. Well, I may be wrong; it may actually be that frailty that engendered the oldest profession. But I would think that the profession based on the lucrative frailty of greed wasn’t all that far behind.

If we want to exploit other people’s greed, the first thing to ask ourselves is this: why do we want money, given that it is a meta-entity? I know, we all need money to live. But I am not talking about the need part. Assuming the need part is taken care of, we still want more of it. Why? Скажи, что ты миллиардер,,en,Зачем тебе еще один миллиард,,en,Я думаю, что ответ заключается в чем-то философском,,en,что-то вроде экзистенциального страха,,en,хотя те, у кого есть миллиарды, признают это последними,,en,Причиной этой глубоко укоренившейся потребности в большем количестве является стремление к валидации,,en,или оправдание нашего существования,,en,и смысл и цель нашей жизни,,en,Это все часть этого метафорического святого Грааля,,en,это звучит немного псих,,en,но что еще это может быть,,en,Дез Картес нашего времени сказал бы,,en,У меня куча денег,,en,количественные финансы,,en,Уилмотт,,en,Ультра Богатый,,en,Давайте сначала посмотрим, как люди зарабатывают деньги,,en,Грузы этого,,en,По-видимому,,en,это одна из наиболее часто используемых фраз в Google,,en. Why would you want another billion? I think the answer lies in something philosophical, something of an existential angst, although those with their billions would the last ones to admit it. The reason behind this deep-rooted need for more is a quest for a validation, or a justification for our existence, and a meaning and purpose for our life. It is all part of that metaphorical holy grail. I know, it sounds a bit nutty, but what else could it be? The Des Cartes of our time would say, “I have loads of money, therefore I am!”

The Ultra Rich

Let’s first take a look at how people make money. Loads of it. Apparently, it is one of the most frequently searched phrases in Google, и результаты обычно пытаются отделить вас от ваших денег, а не помочь вам сделать больше,,en,По честному,,en,эта колонка не даст вам быстро разбогатеть,,en,безошибочные схемы или стратегии,,en,Что он скажет вам, почему и как некоторые люди зарабатывают деньги,,en,и, надеюсь, раскрыть некоторые новые идеи,,en,Вы можете использовать некоторые из этих идей для работы и сделать себя богатым,,en,если ты думаешь, что в этом твое счастье,,en,К настоящему времени,,en,большинству людей ясно, что они не могут стать грязными, работая на кого-то другого,,en,это утверждение не совсем точно,,en,Все руководители и топ-менеджеры работают на акционеров компаний, которые их нанимают,,en,но грязно богаты,,en,некоторые из них,,en,В основном,,en,Это правда, что вы не можете зарабатывать серьезные деньги, работая в компании,,en,статистически говоря,,en.

To be fair, this column won’t give you any get-rich-quick, sure-fire schemes or strategies. What it will tell you is why and how some people make money, and hopefully uncover some new insights. You may be able to put some of these insights to work and make yourself rich – if that’s where you think your happiness lies.

By now, it is clear to most people that they cannot become filthy rich by working for somebody else. In fact, that statement is not quite accurate. CEOs and top executives all work for the shareholders of the companies that employ them, but are filthy rich. At least, some of them are. But, in general, it is true that you cannot make serious money working in a company, statistically speaking.

Работая на себя,,en,если вы очень удачливы и чрезвычайно талантливы,,en,Вы можете сделать связку,,en,Когда мы слышим слово,,en,богатый,,en,люди, которые приходят на ум, как правило,,,en,предприниматели / промышленники / программные магнаты,,en,как Билл Гейтс,,en,Ричард Брэнсон и др.,,en,знаменитости,,en,актеры,,en,писатели и т. д.,,en,профессионалы в области инвестиций,,en,Уоррен Баффет,,en,мошенники из школы Мэдоффа,,en,Существует общая нить, которая проходит через все эти категории богатых людей.,,en,и усилия, которые делают их своими деньгами,,en,Это понятие масштабируемости,,en,Чтобы понять это хорошо,,en,давайте посмотрим, почему существует предел того, сколько денег вы можете заработать как профессионал,,en,Допустим, вы очень успешный,,en,высококвалифицированный специалист,,en,скажем мозговой хирург,,en,Вы берете 10 тысяч долларов за операцию,,en,из которых вы выполняете один день,,en,Таким образом, вы делаете о,,en,миллион в год,,en,Серьезные деньги,,en,без сомнений,,en – if you are very lucky and extremely talented – you may make a bundle. When we hear the word “rich,” the people that come to mind tend to be

  1. entrepreneurs/industrialists/software moguls – like Bill Gates, Richard Branson etc.,
  2. celebrities – actors, writers etc.,
  3. investment professionals – Warren Buffet, for instance, and
  4. fraudsters of the Madoff school.

There is a common thread that runs across all these categories of rich people, and the endeavors that make them their money. It is the notion of scalability. To understand it well, let’s look at why there is a limit to how much money you can make as a professional. Let’s say you are a very successful, highly-skilled professional – say a brain surgeon. You charge $10k a surgery, of which you perform one a day. So you make about $2.5 million a year. Serious money, no doubt. Как вы увеличиваете это, хотя,,en,Работая вдвое дольше и заряжаясь больше,,en,может быть, вы можете сделать,,en,миллион или,,en,миллиона,,en,Но есть предел, который вы не сможете превзойти,,en,Ограничение наступает потому, что фундаментальная экономическая сделка подразумевает продажу вашего времени,,en,Хотя ваше время может быть высококвалифицированным и дорогим,,en,у вас есть только,,en,часов этого в день, чтобы продать,,en,Это ваш предел,,en,Теперь возьмите пример,,en,сказать,,en,Джон Гришем,,en,Он тратит свое время на изучение и написание своих самых продаваемых книг,,en,В этом смысле,,en,он также продает свое время,,en,Но большая разница в том, что он продает его многим,,en,И количество людей, которым он продает свой продукт, может иметь экспоненциальную зависимость от его качества и,,en,время, которое он тратит на это,,en,Мы можем увидеть аналогичную картину в программных продуктах, таких как Windows XP,,en? By working twice as long and charging more, may be you can make $5 million or $10 million. But there is a limit you won’t be able to go beyond.

The limit comes about because the fundamental economic transaction involves selling your time. Although your time may be highly-skilled and expensive, you have only 24 hours of it in a day to sell. That is your limit.

Now take the example of, say, John Grisham. He spends his time researching and writing his best-selling books. In that sense, he sells his time as well. But the big difference is that he sells it to many people. And the number of people he sells his product to may have an exponential dependence on its quality and, therefore, the time he spends on it.

We can see a similar pattern in software products like Windows XP, выступления артистов,,en,спортивные мероприятия,,en,фильмы и тд,,en,Один спектакль или достижение продается бесчисленное количество раз,,en,С небольшой натяжкой,,en,мы можем сказать, что предприниматели также продают свое время,,en,что они тратят на создание своего бизнеса,,en,многократно,,en,клиентам,,en,клиенты,,en,пассажиры и т. д.,,en,Все эти прядильщики усердно работают, чтобы развить экспоненциальную зависимость объема от качества своих продуктов или времени, которое они тратят на них.,,en,Это единственный способ решить проблему масштабируемости, возникающую из-за нехватки времени,,en,Инвестиционные профессионалы,,en,банкиры,,en,сделай это тоже,,en,Они разрабатывают новые продукты и идеи, которые они могут продать массам,,en,К тому же,,en,они используют другой аспект денег, который мы затронули в предыдущей колонке,,en,деньги имеют транзакционную ценность,,en, sports events, movies and so on. One performance or accomplishment is sold countless times. With a slight stretch of imagination, we can say that entrepreneurs are also selling their time (that they spend setting up their businesses) multiple times (to customers, clients, passengers etc.) All these money-spinners work hard to develop some kind of exponential volume-dependence on the quality of their products or the time they spend on them. This is the only way to address the scalability issue that comes about due to the paucity of time.

Investment professionals (bankers) do it too. They develop new products and ideas that they can sell to the masses. In addition, they make use of a different aspect of money that we touched upon in an earlier column. You see, money has a transactional value. Он играет роль посредника, способствующего экономическим обменам,,en,В финансовых операциях,,en,деньги становятся субъектом, на который совершается операция,,en,Финансовые системы по существу выводят деньги из сбережений и превращают их в капитал,,en,Таким образом, деньги приобретают инвестиционную ценность.,,en,в дополнение к его внутренней транзакционной стоимости,,en,Эта инвестиционная стоимость является основой интереса,,en,Деньги это странная вещь,,en,Это совсем не похоже на любой другой,,en,вещь,,en,что мы знаем,,en,Его ценность проявляется только в социальном контексте, где у нас есть заранее согласованные соглашения о том, что это должно быть,,en,В этом смысле,,en,деньги не вещь вообще,,en,но мета вещь,,en,вот почему вы счастливы, когда ваш босс дает вам письмо, в котором говорится, что вы получили жирный бонус, даже если вы на самом деле не видите физическую вещь,,en,если это не физическое,,en,это метафизика,,en. In financial transactions, however, money becomes the entity that is being transacted. Financial systems essentially move money from savings and transforms it into capital. Thus money takes on an investment value, in addition to its intrinsic transactional value. This investment value is the basis of interest.

Philosophy of Money

Money is a strange thing. It is quite unlike any other “thing” that we know. Its value manifests itself only in a social context where we have pre-agreed conventions as to what it should be. In this sense, money is not a thing at all, but a meta-thing, which is why you are happy when your boss gives you a letter stating that you got a fat bonus even though you never actually see the physical thing. Well, if it is not physical, it is metaphysical, и мы, безусловно, можем говорить о философии денег,,en,Первое указание на метасность денег происходит от того факта, что они имеют ценность только тогда, когда мы присваиваем им ценность.,,en,Он не обладает внутренней ценностью, которая,,en,вода делает,,en,Если вы хотите пить,,en,вы обнаружите, что вода имеет огромную внутреннюю ценность,,en,если у тебя есть деньги,,en,вы можете купить воду,,en,или Perrier,,en,если вы хотите быть сложным,,en,и утолить жажду,,en,Но мы можем оказаться в ситуациях, когда мы не можем покупать вещи за деньги,,en,Мель в пустыне,,en,умирает от жажды,,en,мы не можем покупать воду, несмотря на наши невероятные кредитные лимиты или сотни долларов, которые у нас могут быть в нашем кошельке,,en,Одна из причин нашей неспособности очевидна,,en,мы можем быть одни,,en.

The first indication of the meta-ness of money comes from the fact that it has a value only when we assign it a value. It doesn’t possess an intrinsic value that, for instance, water does. If you are thirsty, you find that water has enormous intrinsic value. Of course, if you have money, you can buy water (or Perrier, if you want to be sophisticated), and quench your thirst.

But we may find ourselves in situations where we may not be able to buy things with money. Stranded in a desert, for instance, dying of thirst, we may not be able to buy water despite our sky-high credit limits or the hundreds of dollars we may have in our wallet. One reason for this inability of ours is obvious – we may be alone. Основная транзакционная стоимость денег испаряется, когда нам не с кем совершать сделки,,en,Второе измерение метасности денег - экономическое,,en,Это иллюстрируется изношенным принципом спроса и предложения,,en,при условии транзакционной ликвидности,,en,это термин, который я только что приготовил, чтобы звучать эрудит,,en,Я признаюсь,,en,Я хочу сказать,,en,даже если у нас есть желающие продавцы воды в пустыне,,en,они могут видеть, что мы умираем за это и взвинчивать цену,,en,только потому, что мы готовы и способны платить,,en,Это очевидное срывание со стороны коварных продавцов воды,,en,совершенно законно,,en,Кстати,,en,возможно только в том случае, если товар находится в изобилии,,en,Нам нужна товарная ликвидность,,en,как было,,en,Это когда ликвидность иссякает, начинается самое интересное,,en.

The second dimension of the meta-ness of money is economical. It is illustrated in the well-worn supply-and-demand principle, assuming transactional liquidity (which is a term I just cooked up to sound erudite, I confess). I mean to say, even if we have willing sellers of water in the desert, they may see that we are dying for it and jack up the price – just because we are willing and able to pay. This apparent ripping off on the part of the devious vendors of water (perfectly legal, by the way) is possible only if the commodity in question is in plentiful supply. We need commodity liquidity, as it were.

It is when the liquidity dries up that the fun begins. Последняя капля воды в пустыне имеет бесконечную внутреннюю ценность,,en,Этот эффект может выглядеть аналогично вышеупомянутому явлению спроса и предложения,,en,но это действительно отличается,,en,Внутренняя ценность доминирует над всем остальным,,en,очень похоже на сильную силу на короткие расстояния в физике частиц,,en,И это господство является обратной стороной закона убывающей предельной полезности в экономике,,en,Что касается денег, то это выглядит немного странно: они противоречат закону убывающей предельной полезности,,en,Чем больше у тебя денег,,en,чем больше ты этого хочешь,,en,это почему,,en,Это особенно странно, учитывая отсутствие внутренней ценности,,en,Великие финансовые умы не могли понять это,,en,но придумали содержательные и запоминающиеся высказывания вроде,,en,алчность,,en,из-за отсутствия лучшего слова,,en,это хорошо.,,en. This effect may look similar to the afore-mentioned supply-and-demand phenomenon, but it really is different. The intrinsic value dominates everything else, much like the strong force over short distances in particle physics. And this domination is the flipside of the law of diminishing marginal utility in economics.

The thing that looks a bit bizarre about money is that it seems to run counter to the law of diminishing marginal utility. The more money you have, the more you want it. Now, why is that? It is especially strange given its lack of intrinsic value. Great financial minds could not figure it out, but came up with pithy and memorable statements like, “Greed, for lack of a better word, is good.” Хотя этот конкретный гений был только вымышленным,,en,он воплощает большую часть мышления в современном корпоративном и финансовом мире,,en,Хорошо или плохо,,en,давайте предположим, что жадность является неотъемлемой частью человеческой природы, и посмотрим, что мы можем с ней сделать,,en,Обратите внимание, что я хочу сделать что-то,,en,с участием,,en,Это,,en,не,,en,около,,en,важное различие,,en,бесстрашный обозреватель, что я,,en,хочу показать вам, как использовать жадность других людей, чтобы заработать больше денег,,en,Attribution-ShareAlike Лицензия,,en,Архив юмора,,en, he does epitomize much of the thinking in the modern corporate and financial world. Good or bad, let’s assume that greed is an essential part of human nature and look at what we can do with it. Note that I want to do something “with” it, not “about” it – an important distinction. I, intrepid columnist that I am, want to show you how to use other people’s greed to make more money.

Photo by 401(K) 2013