Wednesday, 24 March 2010

The Big Short

Michael Lewis, author of the previously recommended baseball book “Moneyball”, has a new book out about finance called “The Big Short”. According to the reviews I have read, Mr. Lewis has “produced what is probably the single best piece of financial journalism ever written” and “a fascinating, edge-of-the-seat read. It's also a gold mine of valuable insights about how the modern economy really functions -- and what you need to watch out for.” “If you read only one book about the causes of the recent financial crisis, let it be Michael Lewis's, "The Big Short."”

High praise indeed, and my copy has been ordered.

Based on the reviews from Barnes and Noble it resembles Moneyball in many ways, for example “not everybody will understand the grittiest of the details, of course: that's inevitable. But everybody will be gripped by the book's narrative, all the same.”

Key takeaways that have some relevance to sports betting for me include:

1. Never, ever invest in something you don't fully understand.
2. Protect your bank.
3. Don’t trust the herd.

“If there's a conspiracy in the markets, it's neither bullish, bearish, right wing nor left wing -- it's simply to support the consensus.

Human beings are social animals. There is a powerful, built-in bias to want to agree with those around you. The most striking thing about Lewis' story is that many more people on Wall Street should have seen this coming. The data was available, the analysis relatively simple to those employed in finance. But among the tens of thousands of overpaid whiz kids at all the hedge funds and big banks around the world, only a few actually got it right all the way along. They were generally oddballs who were able to distance themselves, emotionally, from the crowd.”

That last sentence could describe many of the winners on the betting exchanges!

Michael Lewis writes about men whose “social skills are all but nonexistent; they live in a world of arcane financial analysis which might as well be a different planet for all that it has any bearing on the way that most of us live our lives; and they made their outsize profits by wagering hundreds of millions of dollars on the proposition that Americans across the country would end up being thrown out of their homes after they found themselves unable to make their mortgage payments.”

At least the traders who make their money from the betting exchanges aren’t as wicked as that! As much as some may try to manipulate the betting markets, and assuming they are not fixing the results, anyone who tries to shift the prices too far, i.e. to the point where they become value for a sharper mind, will get their fingers burned in the long-term.

I’ll probably post again on this book when I have read it.

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