Book Review: Loss Coverage – Why Insurance Works Betters with Some Adverse Selection

In his book, Loss Coverage: Why Insurance Works Better with Some Adverse Selection, Guy Thomas propose an interesting point that adverse selection may not be as harmful as many actuaries believe. They actually go further and suggest that, at least from a policy perspective, adverse selection may be a good thing.

This is particularly relevant given the ambition of some InsurTech players to hyper select risks or price on many more factors than are traditionally used in order to gain a competitive advantage.   Thomas doesn’t argue that it will be individual insurers’ interests to allow adverse selection, but if these companies are successful it may then have implications for policy makers.

Incidentally, there are some interesting reasons for insurers themselves (with commercial interests) to be wary of selecting too well, counterintuitive as that may seem, but more on that for another time. Continue reading “Book Review: Loss Coverage – Why Insurance Works Betters with Some Adverse Selection”

Book Review: Flash Boys

Michael Lewis, of Liar’s Poker and The Big Short fame, has written a book on the world of High Frequency Trading. The booked is called Flash Boys and it’s more or less as entertaining has Lewis’s recent books.  That’s a good thing, even if it doesn’t quite reach the highs of Liar’s Poker (which you absolutely must buy if you haven’t read it before.)

In some ways I’m surprised more hasn’t come of Flash Boys – when it was published there was some noise about investigations and hearings into the allegations in the book.  I’m not aware that any of that led to anything. However,  my reaction should give you an idea of how explosive the allegations in the book are. I went from misunderstand HFT as a algorithm based approach to trading based on patterns in the data to (probably still misunderstanding) HFT as a parasitic arms race against “regular investors” who are potentially losing money to at least some of the HFT firms without any tangible benefit.

Read the book just to open your mind to the possibilities and for a new appreciation of the speed of light through glass.

Book Review: Bitcon – The Naked Truth About Bitcoin

Jeffrey Robinson, the author of the well known book “Laundrymen” that I’m now reading, has written an engaging story about The Satoshi Faithful (as he calls them) supporters of Bitcoin and where their Faith is leading them stray.

The book is called BitCon: The Naked Truth About Bitcoin and it doesn’t pull punches in deriding the would-be currency. If you don’t know anything about Bitcoins, it may skip over some of the introductions necessary to hold your own in conversation. This isn’t a primer on Bitcoins or crypto-currencies, but it also doesn’t spend chapters on involved technical details so you won’t be completely lost.

I described the book as “engaging”. For me, already very sceptical of the long-term chances of success for Bitcoin and specifically  critical of its suitability as real “currency”, it had me nodding in agreement with many sections. Frankly, I don’t know how persuasive it would be to a fervent supporter (not that much anything would be).

I did enjoy the insights into some of the personalities behind Bitcoin and the histories of different supporters and how this has changed over the short time Bitcoins have been around. I learnt more about the Dark Web than I knew before, gaining a new appreciation for how dark the underbelly of the web and Bitcoins are.

Robinson ignored what I think is a key limitation on Bitcoin. Supporters claim its value derives in large part from the limited supply, but without any intrinsic value, other crypto-currencies are near-perfect substitutes. I’ve blogged about this before and was looking forward to seeing another take on it.

I enjoyed the book, reading through it fairly quickly and without wanting to switch to something else, suggesting Robinson hit the target with length and balance of information vs entertainment.

Go grab a copy from Amazon – BitCon: The Naked Truth About Bitcoin.

Book Review: The Trouble With Strategy

Kim Warren has a trouble. His trouble is with the art and science of business strategy. His book, The Trouble with Strategy: The brutal reality of why business strategy doesn’t work and what to do about it, outlines how poorly mainstream strategy ideas have performed and how slowly (if at all) the “profession of strategy” has evolved over time.

He lays into business schools, many strategy consultants, academics and anyone in spitting distance.

The good news is that the first half of the book is engaging and fresh, outlining a novel way of understanding the performance of strategy as an area of study and practice.

I slowly found myself wrinkling my nose, tilting my head to one side and thinking “that’s not really a fair comparison”. For example, comparing the rigour of engineering or accounting or even medicine to business strategy I can’t help but wonder if Warren understands the the difficulty in running repeatable, controlled experiments on corporations when virtually no two are alike. The human body is extremely complex, but we have 7 billion examples to look at, all made in mostly the same way with limited evolution in front of our eyes.

I lost interest towards the end of the book as the insights quickly dried up.

Warren has a point. Strategy and strategy consulting is possibly a broken discipline. Academics and consultants and executives need to share what works better. Business schools may not all be perfect. But his book doesn’t provide much in the way of useful answers.

Book Review: The Hedge Fund Mirage [updated]

The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True is an  account of where the money is made in hedge funds and a series of anecdotes about exactly how many different ways everything can go wrong.

Author, Simon Lack, combines easy reading prose with sufficiently crisp examples to make his points clearly. His time at JPMorgan included a stint evaluating hedge fund managers and their performance, focusing on snagging a share of the fees the managers earn rather than the performance the investors eek out.

His main contention is that from 1998 to 2010, investors would have done better to invest in T-Bills than hedge funds – a truly alarming claim.  I didn’t recalculate his numbers and I’ve heard a few disagree with them [Update, many disagree with some convincing arguments on technical errors. I don’t agree with all the criticisms, but there are enough valid concerns to mean you should take this book with a pinch of salt  aima_research_committee_paper_-_methodological_mathematical_and_factual_errors_in_the_hedge_fund_mirage_-_august_2012]  . However, he backs up this numerical result with a list of the ways in which hedge fund managers can get things wrong. Everything from outright fraud to disingenuous legal contracts and on to greed-induced cumbersome fund sizes.

I’ve read plenty of academic papers before demonstrating how difficult it is to trust hedge fund performance figures (the author touches on these too) but this is the first time I understood the potential practical extent of the problem.

If you’re invested in hedge funds or considering investing in hedge funds, read the book. It’s engaging and will at least prep you with some better questions to ask. At most, it may put you back into a traditional investment vehicle instead.


Book Review: The End of Influence

Brad de Long and Stephen S. Cohen have a new book called The End of Influence: What Happens When Other Countries Have the Money.  It’s an interesting, informative, provocative and relevant read, providing context for the economic position the US finds itself in now. Perhaps of more direct interest, the issues of currency manipulation (done to the US), foreign policy, industrial (and defence) policy, trade deficits and long-term structural problems within an economy are definitely relevant to South Africa.

The rise of the Asian Tigers (and Japan and China included in the wider group) and the role government policies on both sides of the Pacific played there should hold lessons for South Africa.  Hell, even France and Britain are thrown in for good measure, demonstrating the successes and failures of neo-liberal market oriented policies.

This book must really be read in conjunction with This Time is Different as together they reinforce the unavoidable conclusion that overzealous reducing regulation, liberating markets and increasing financial complexity are almost guaranteed to lead to disaster. The Anglo-Saxon mantra for a couple of decades at least now has been that those very things were the answer to our problems, not the cause.

I read the book on holiday. It’s not the traditional rip-roaring holiday read, but the style is light enough to enjoy and doesn’t have the density of statistics and numerical proof offered by This Time is Different. The explanation of how we got to where we are are fascinating and definitely food for thought for South Africa and other emerging markets, but their prognosis of how the US’s power will fade dramatically now that they no longer have The Money is even more evocative. I spent as much time holding my kindle to one side while thinking about the implications as I did reading the words and frantically clicking the next page button to get to the next page.

Buy it, read it and join the conversation on economic policies for South Africa and emerging markets.

Brad de Long has an economics (and a few others things) blog that I read from time to time. I’ve also watched several of his economic lecture videos available freely on iTunes University.  He’s worth paying attention to. I haven’t had contact with his co-author before, but if de Long likes writing with him he’s probably smarter than most people you or I have heard of before.

Book Review: Three Cups of Deceit

Three Cups of Deceit: How Greg Mortenson, Humanitarian Hero, Lost His Way of Chris Mortenson and his best-selling books “Three Cups of Tea”, and “Stones into Schools”.

Three Cups of Tea tells the supposedly true story of Greg Mortenson and the Central Asia Institute (CAI) building schools in Pakistan while on a rip-roaring adventure of Taliban kidnappings amongst other tales. I received it as a present and enjoyed the moving story.

Except that, as it turns out, much of the story is stretched, elaborated and in parts completely concocted.  Jon Krakauer writes, in Three Cups of Deceit, how the seemingly sociopathic Greg Mortenson not only fabricated key parts of the story (and in contradiction of earlier, published articles by his own hand) but also ran the organisation for personal gain.

It’s definitely worth a read, even if it is a little sad to realise that a hero is actually a charlatan.

A point many of Mortenson’s supporters make is that he still did good – he and his CAI did build schools, did educate children and did raise awareness of society building as key methods of improving living standards and understanding in troubled parts of the world.

The problem I have there is that many people who donate money to charities, NGOs and similar programmes will donate the money to a cause anyway. Therefore, a significant portion of  funds that went to the CAI would have gone to other causes if it weren’t for Mortenson’s lies.  Moreover, that money wouldn’t have been squandered on Mortenson, on promoting his book, or on the now-empty schools built in the wrong places without equipment or teachers.

Mortenson redirected money away from good, solid causes and into his own pocket.

Book Review: This Time is Different

This Time Is Different: Eight Centuries of Financial Folly is a fascinating look at 8 centuries of financial crises including banking, currency and sovereign default.

It’s chock-full of analysis, numbers, tables and charts showing how as much as things change, the scope for financial crises changes very little.  The comparison of Developed and Emerging Markets is particularly interesting in that the differences, while they do exist, are far smaller than stereotypical views.  Emerging Markets do tend to have more ongoing sovereign defaults, but the frequency of banking crises is little different. Weirdly, some aspects of Emerging Market crises (such as employment impacts) are less than average for the Developed World.

It isn’t really the book’s fault, but this was one of the few books that I struggled with on my kindle – the graphs and charts and captions to figures were particularly difficult to read. Perhaps they would look better on the Kindle DX (the larger model) or even an iPad or something.

Although the book doesn’t focus on the current (still-happening, if you weren’t paying attention) financial crisis, there are several chapters dedicated to it with an analysis of the economic indicators leading up to the crash. Now it’s incredibly easy to predict an event after it’s happened, but I’m still hopeful that the results can be useful in predicting future problems and potentially impacting economic policies and regulations for the better.

Some key conclusions from the book for predictors of financial crises:

  • markedly raising asset prices (yes, and in particular house prices given the likely co-factor of increases in debt levels)
  • slowing real economic activity
  • large current account deficits
  • sustained debt build-ups (public and/or private)
  • large and sustained capital inflows to a country
  • financial sector liberalisation or innovation Continue reading “Book Review: This Time is Different”