Money is not a physical reality or absolute, it is a collective social belief tool that works very well. My anthropology is showing. Money in large collections reflects trust and faith pooled by a group.
The art of managing risk is currently messed up as it is considered a physical science when in reality it is significantly a social science. The tools, language and metaphors used to describe risk management are mostly 2nd rate physics and introductory probability.
Paul Wilmott has an excellent example of people thinking in boxes and it involves a simple question about a deck of cards and a magician. The Original post is here. The all too scary follow up post is here.
Willmott's magician is as important if not more important than Taleb's Swan in my opinion.
The disconcerting nature of the Willmott follow up article is that it shows people in roles of risk management woefully lacking even the basic skills that it requires, namely imagination and mental flexibility.
The risk managers who can't wrap their heads around Willmott's Magicians test seem to have some form of cognitive aphasia which has removed all common sense from them. In a word, they are so enamored with the "laws" of probability that they forget they live and manage a social resource. Money is a social phenomenon, gamed individually or collectively constantly by people, not diffusion equations with the appropriate drifts.
If you are interested in risk or understand the reason that human behaviour means that the next minsky moment will arrive as soon as we collectively forget the last one, please read the Wilmott Blog posts and think about the skills in a risk manager.
If your risk management process is lead by PHD's who don't pass the magician test, please put them in a room or island where they can do little harm or better yet, get them into a math dept. where they can do some good.
I am still advocating the book Since Yesterday first written in 1940 as a great way to understand the thinking, events and cultural process known as the great depression. Spoiler Alert:there was a mini echo depression in 1937 when the "stimulus" of the era disappeared. Since Yesterday is a very rich read and maps disturbingly well to today.
About that social experiment. This cartoon sums up the interaction between risk management and people's desire quite nicely from Jesse's cafe Americain.
Here is a link to the original source of the comic Abstruse Goose. Tip o' the cap to Noah Yetter.
Minsky moments won't leave us, we are human after all. Shakespeare figures, bubbles and greed won't go out of style, they are classics and endimic to the human cultural condition, please find risk managers who understand that better than physics.
