Rethinking Risk with Rick Bookstaber

If financial risk doesn’t confuse you, you’re not paying attention.

That’s advisable.

Market minutia gets treated like breaking news around the world, and people listen even though it’s “a tale told by an idiot, full of sound and fury, signifying nothing,” as the late Jack Bogle told me in 2017 (and Shakespeare wrote a few hundred years earlier).

But the mad moron has a megaphone. Traders listen and then act altogether, which makes them feel like risk exists in two states: on and off.

It’s not so binary in real life.

I’ve pasted a slide from Deutsche Bank’s 2019 market outlook below. At first glance, it shows that risk comes in at least thirty flavors. But seventeen of the scary things it lists have happened, and US Equity markets are just a hair’s breadth from all-time-highs.

So are these things even risks?

Ashby and I weren’t sure when we sat down to tape the last episode of Free Money, so we decided to phone a friend: Rick Bookstaber. He’s the chief risk officer for the University of California’s investment funds—which oversee roughly $120 billion—and a founder of the financial technology firm Talagent.

Before that, he developed risk models to assess vulnerabilities and help stabilize the U.S. financial system at the US Treasury after the financial crisis and served as chief risk officer at Bridgewater, Moore Capital, Solomon Brothers, and Morgan Stanley. He also wrote The End of Theory, an in-depth look at how to account for the human complexity of our financial system.

In other words, we were glad he picked up.

We talked about how agent-based modeling can be used to build a better picture of what’s happening in the markets and why you’re better off ignoring the ones which most often make headlines, like Brexit and the trade wars.

Then as always, we took questions from our listeners. Check out the podcast to find out how the office ball pit below featured in our conversation.

• I am an Indian citizen, but has kept its money in Swiss bank accounts since my grandfather's time. As of this month, government has all my account details. I'm worried they are going to take my money. What can I do?

• I run a venture-backed startup in Austin, and the firm that led my "A" round is based in China. I love working with them, but worry that the trade war will somehow affect their ability to follow on in later rounds of funding and doom our company. Am I wrong to worry about this? What should I do?

• I'm a few years out of business school, working at a multinational company that signed onto the Business Roundtable's recent statement about shareholder value. Their words are nice, but nothing seems to have changed. Should I whistleblow? Would anyone care? Would it help?