Taleb is back, and he is even more brash and brilliant. Nassim Nicholas Taleb’s fame grew from his second book, The Black Swan, being timely released just before the 2008 financial crisis. Antifragile continues his narrative on probability and risk. The Black Swan took on the theory that the highly improbable was a lot more probable than we thought. Antifragile takes the next step and proposes that it’s good to be subject to black swan events and other disorder.

He coins the term “antifragile” to address the situation where something improves as it is subject to disorder or stress. I goes beyond robust. I thought the best explanation was through the use of mythology.

The sword of Damocles is fragile. All it takes is a small amount of damage to sever the horsehair and send the sword plummeting into the person sitting beneath it.

The phoenix is robust. Once it dies, it is reborn from its ashes to live again.

The hydra is antifragile. If you mange to cut off one of its heads, two sprout in its place. The more damage it takes, the more powerful it becomes.

The next step is to realize that the effects of fragility are not linear. As the overload increases, the damage increases dramatically. Getting hit by by one rock weighing 50 pounds will hurt a lot more than getting hit by 1000 rocks that weigh 0.05 pounds. There is an acceleration of harm. The black swan comes when you get hit by the 50 pound rock, when you had been expecting another pebble.

The book is an excellent reading choice for anyone involved in compliance or risk management

The publisher sent me a free copy of the book in hopes of a review.

Professor Tamar Frankel of Boston University School of Law tackles investment fraudsters and their victims in her book, The Ponzi Scheme Puzzle. As a scholar of investment fraud, Frankel has studied cases for years to find common themes and patterns. The books offers descriptions of the offers and red flags the ways in which fraudsters mask their deception through their methods of advertising and pitching their “product”.

There is a lot in the book. I just wish there were more. It’s hard to lump Enron, Madoff, Multi-level marketing, selling the Brooklyn Bridge, and selling fake securities fraud schemes into one book, especially one as short as this. Frankel skips from subject to subject and fraud to fraud very quickly, drawing broad conclusions.

Perhaps I’m naive, but I think many Ponzi schemes start off as legitimate investment opportunities, but derail as they grow and the strategy falters. Charles Ponzi himself saw a legitimate opportunity. He saw a potential for profit in the difference in currency for return stamps. He failed to execute on the vision and failed to tell his investors when the investments didn’t work.

Enron started off a legitimate company taking an innovative approach to energy. It became so focused on hitting its earnings that it started doctoring the books to hit the numbers. The guy on the street corner trying to sell foreign tourists an interest in the Brooklyn Bridge is a different kind of criminal.

Professor Frankel does point out some interesting ways that society views investment fraudsters and their victims. We take a much harsher view of the scam artist that convinced an elderly pensioner to invest her small amount of lifetime savings, than millionaire scam artists skimming millions from other millionaires.

Sources:

• Examining the Ponzi Scheme Through the Mind of the Con Artist in DealBook
• Ponzi Scheme Puzzles in the SEC Historical Society
• Four Signs Your Awesome Investment May Actually Be A Ponzi Scheme in NPR’s Planet Money

Buy the Book:

One of my recurring annual goals is to finish reading at least 26 books for the year. In 2012, I managed to finish 36. Although, 6 of those were lighter reads. So maybe I should discount those and bring it down to 30. In any event, I exceeded my goal. The full list is below.

Reviews

Some of the titles will look familiar since I gave them a longer write up here on Compliance Building. I also mentioned a few on Wired.com’s GeekDad and my personal blog. There are links that will take you to my reviews.

GoodReads versus LibraryThing

I’m still tracking my books in two parallel systems.  Library Thing has a superior platform for cataloging books. GoodReads has a better platform for interacting with other readers, sharing reviews, and sharing booklists. Each has their strengths and weaknesses. I’d like to jettison one of them to quit duplicating efforts. So far, neither one has made a compelling move to improve and elbow the other out of the way.

2012 Reading List

Title		Author	Rating
How: Why How We Do Anything Means Everything		Dov Seidman	Review
Defending Jacob: A Novel		William Landay	Review
The Big Roads: The Untold Story of the Engineers, Visionaries, and Trailblazers Who Created the American Superhighways		Earl Swift	Review
Ten Tea Parties: Patriotic Protests That History Forgot		Joseph Cummins
A Dance with Dragons: A Song of Ice and Fire: Book Five		George R.R. Martin
Why the Law Is So Perverse		Leo Katz	Review
The Power of Habit: Why We Do What We Do in Life and Business		Charles Duhigg	Review
A Visit from the Goon Squad		Jennifer Egan
The Richer Sex: How the New Majority of Female Breadwinners Is Transforming Sex, Love and Family		Liza Mundy	Review
Eden on the Charles: The Making of Boston		Michael Rawson	Review
The Walking Dead, Book 7		Robert Kirkman
Ruin Nation: Destruction and the American Civil War		Megan Kate Nelson
Catching Fire (The Hunger Games, Book 2)		Suzanne Collins
Mockingjay (The Hunger Games, Book 3)		Suzanne Collins
Show Time		Phil Harvey	Review
The First Tycoon: The Epic Life of Cornelius Vanderbilt		T.J. Stiles	Review
Cutting-Edge Cycling		Hunter Allen
Gone Girl		Gillian Flynn
Pines		Blake Crouch
Amazing Gracie: A Dog’s Tale		Dan Dye
The Age of Miracles		Karen Thompson Walker
Sharp Objects		Gillian Flynn
Already Gone		John Rector
Nine Steps to Sara		Lisa Olsen
The Walking Dead, Book 8		Robert Kirkman
The American Alpine Journal 2012		John III Harlin
Moby-Duck: The True Story of 28,800 Bath Toys Lost at Sea and of the Beachcombers, Oceanographers, Environmentalists, and Fools, Including the Author,Who Went in Search of Them		Donovan Hohn
Apocalypse Z: The Beginning of the End		Manel Loureiro
The Dead Room		Robert Ellis
Make Magic! Do Good!		Dallas Clayton	Review
xkcd: volume 0		Randall Munroe
Save Yourself, Mammal!: A Saturday Morning Breakfast Cereal Collection		Zach Weinersmith
The Physics of Wall Street: A Brief History of Predicting the Unpredictable		James Owen Weatherall	Review
The Most Dangerous Game: A Saturday Morning Breakfast Cereal Collection		Zach Weinersmith
The Remaining		D.J. Molles
No-Man’s Lands: One Man’s Odyssey Through The Odyssey		Scott Huler	Review

Warren Buffett famously warned, “beware of geeks bearing formulas.” After the Great Panic of 2008, many pundits placed the blame on derivatives and other “complex financial instruments.” That would lead one to believe that the blame lies with the physicists and mathematicians who dreamed them up. James Owen Weatherall decided to look behind that blame and explore the history of how physicists came to Wall Street. The result is The Physics of Wall Street: A Brief History of Predicting the Unpredictable.

The book is an engaging exploration of the men who took turns trying to create mathematical formulas to explain stock price movement, with the hope of predicting that movement.

The early models always failed. Weatherall pins the crashes in 1987, 1997, and 2008 on the failure of the models. Although he shifts the blame from the physicists to the heads of the Wall Street firms. Their failure came about because they failed to think like physicists. Models, whether in science or finance, have limitations. They break down at the edges and under certain conditions. In each of those financial crises these sophisticated models fell into the hands of people who didn’t understand their limitations.

Don’t think the book is focused on financial models and mathematical derivatives. It’s focused on the individuals, their stories, the steps they took before creating their models, how their models ere adopted (or not), and, ultimately, how their models failed.

One item I found fascinating was that most of the physicists starring in the book took their first steps towards wealth creation in gambling, and not finance. You can make your own joke about that. Each took an attempt to better define probabilities so they could make better wagers. Early on, it was dice games. Blackjack was popular. One gentleman even tried to devise a computer to predict roulette. Ultimately, they each discovered that there was more money to be made on Wall Street.

Each model got better and better. But each ultimately failed. Some of that can be traced back to success causing a failure. As more firms adopted the model, their behavior changed and therefore the model became based on outdated behavior.  Ultimately, the book seems to lend credence to Taleb’s Black Swan theory.  The improbable will happen and all the financial models fail to account for the improbable financial calamities happening more often than the models predict.

I have to admit that I thought the book might be a dry slog on finance and probability. But, it was surprisingly enjoyable to read. If you have any interest in the quant side of Wall Street or probability theories, this book provides a great historical background.

The publisher was nice enough to send me preview in hopes that I would write about the book. It goes on sale January 2, 2013.

There were the rich, the super rich, and Cornelius Vanderbilt. T.J. Stiles takes you through the life of the Commodore in The First Tycoon: The Epic Life of Cornelius Vanderbilt.

Sons are notoriously prone to exaggerate the importance of their fathers, as are biographers with their subjects…

Vanderbilt founded a dynasty. The First Tycoon starts with one of the final challenges to that dynasty. The Commodore had left the vast majority of his estate to one of his children. The rest were challenging his will. He wanted his business empire to continue through his children, without it being severed and control lost.

Cornelius “Commodore” Vanderbilt was born in relatively humble family on Staten Island during George Washington’s presidency.  He started in his father’s footsteps as a boatman. He latched onto the power of steam and assembled a huge fleet of steamships. After conquering the water, he assembled a railroad empire. We see Vanderbilt’s role in transportation revolutions, battling the physical growth of the nation with better and faster means of transportation. Along the way he helped shape the growth of the modern corporation

T. J. Stiles argues that Vanderbilt did more than perhaps any other individual to create the current economic world. His steamships and railroad lines took vast amounts of capital, requiring more than one individual to fund the growth and expansion.

Compliance professionals and securities law aficionados may be fascinated by the growth of the corporate entity. At the time they offered less liability protection than we would expect today.

The history of Vanderbilt is also full of stock manipulation and anti-trust issues. Transportation companies routinely gathered together to set rates and limit competition. When competition did break out, it was a vicious battle between the rivals. Sometimes the battle was waged in the stock market with the players trying to corner securities and punish the wealth of their rivals.

The book does a remarkable job of  balancing the epics tales with a fast-moving narrative.

Almost 40% of US working wives now outearn their husbands. Washington Post reporter Liza Mundy argues that “the Big Flip” in gender roles “is just around the corner” in her new book: The Richer Sex. Soon “women, not men, will become the top earners in households” and that will transform the dynamics of male-female relationships.

Mundy sprinkles interviews with women and men throughout the book to highlight her positions and theories.  She sees the emergence of a country (and world) where both sexes are “freer to make purely romantic choices” based on individual preference rather than constrained by long-held stereotypes about who should be the primary breadwinner. For large parts of the US economy, you don’t need physical strength and stamina to put food on the table and a roof over your head.

Mundy speculates that women are better adapting to the knowledge-driven economy of the United States. Middle skill jobs are disappearing. Men lost 75% of the 7 million jobs that disappeared during the Great Recession. Industrial jobs are being outsourced. That means making the educational leap to higher tier jobs. Women receive 57% of bachelor degrees and account for 60% of graduate school enrollment.

Mundy concludes that the bread-winning woman is dramatically changing the face of marriage and quality of marriage. They prefer a marriage of equals, or at least a man with strong career ambition and intellect. That means women would choose being single to being in a bad marriage. With their earning potential, they don’t need a husband for financial support.

Mundy relates the story of a high-powered executive in a lackluster marriage, with a husband that was resentful of his wife’s career. (He didn’t have one.) They fought over getting a dog. He thought the dog would absorb too much of her time and affection. She ended up getting the dog and he got mad. Then she had a brainstorm. Get rid of him and keep the dog. “The dog is very supportive of her achievements.”

This growth of female breadwinners is not just a US phenomenon. It’s happening in South Korea, Japan, Singapore, France, Chile, Ireland, Belgium, Canada, the Philippines, and Norway. As the world economy is starting to rely more on brainpower than musclepower, women are the winning participants in the economy. There is still great inequality. But it’s changing. This book looks ahead to where that may lead as women overtake men as the breadwinners.

I first heard of this book while listening to an interview of Liz Mundy on a podcast of C-SPAN’s Book TV. (Yes, I’m that much of a geek.) The interview was great and prompted me to run down to the library and borrow a copy. I suggest you do the same.

One of the keys to success in life is instilling good habits. We are creatures of habit. We may like to think that our daily actions result from deliberation and willpower. But mostly they are the products of our unconscious habits. These habits make our lives more efficient. (Try to remember how many steps it took you to get from your front door into your office chair.) Charles Duhigg, an investigative reporter for the New York Times, presents an exploration of this subject in his latest book: The Power of Habit.

Habits are about organic efficiency. They do not distinguish between what is good for you and what is bad for you.  I suppose one of the goals of a good compliance program is to instill good habits in your company and to shut down bad habits. But how?

Duhigg has loaded the book with information on how habit patterns work in the brain and suggestions on how to change them. The scientific study of habits is extensive. Biologists have investigated the habit formation aspect of the brain, but it’s the marketers who have pushed the envelope. They realize that creating habits means products moving off the shelf.

Take the background story on the crafting of Febreeze, the odor eliminating spray. Procter & Gamble came up with a powerful product. One test subject was a park ranger who regularly had to wrangle wayward skunks. Her clothes, her car, and her home all stunk of skunk. Febreeze changed her life. Less odoriferous customers loved the product, but ended up rarely using it.

Then the marketing scientists focused on the habits of cleaning. Febreeze was scent-free. A person would spray it, but the application wouldn’t produce a sensory trigger to create a habit from using it. They added a fresh scent and advertised it for use as the final step in cleaning. “No one craves scentlessness. On the other hand, lots of people crave a nice smell after they’ve spent thirty minutes cleaning.” The addition of scent turned Febreeze from a smart product into a billion dollar product.

The Power of Habit is divided into three parts. The first focuses on individuals and how habits shape lives. Duhigg includes stories on how habits can be broken, reset, and persist. You can be trapped by a predictable cycle: you feel tired in the afternoon, you head out to Dunkin’ Donuts, and then you get the reward of feeling much better. Marketers reinforce these routines by fiddling with the Pavlovian rewards.

Not all habit are good habits. You probably feel trapped by your bad habits. Duhigg argues that you can also escape from the trap of the routines that trigger bad habits. Alcoholics Anonymous has proved so successful in part because it replaces one routine (drinking to feel better) with another (going to meetings and talking about your addiction to feel better). You re-wire your mind to appreciate and seek out the new reward.

The second part looks at the habits of organizations. Duhigg argues that managers can change entire firms by changing habits. A handful of these are “keystone habits” that can change the entire culture of a firm. Duhigg uses Paul O’Neill as a poster child. O’Neill transformed Alcoa by focusing on safety. Worker appreciated not getting injured (or killed) and mangers appreciated the more productive workers. This focus on safety turned out to be a keystone habit that transformed the workplace, increasing a focus on principles and increasing communications across the firm. At first the communication was about safety issues, but that evolved into a more open dialogue.

The book’s third part looks at the habits of societies. Duhigg argues that some of the greatest social reformations have in part been produced by rewiring social habits. He links the pressure of weak ties and social norms with habit.

That all sounds interesting, but can reading The Power of Habit help your compliance program? Yes. I’m rethinking some of my approaches (and own personal behaviors). The appendix is focused on techniques to help focus on habits and how to change habits. Finding keystone habits could help improve your organization.

If you’re interested in more of the research, the book’s notes go on for 50 pages citing hundreds of primary sources and research papers.

The book is full of interesting ideas and based on an impressive collection of research. But it does a great job of balancing intellectual seriousness with practical advice. Even better, it’s written in a lively style, making it easy to read and digest. (The book was on my to read list before the publisher sent me a review copy.)

In Why the Law Is So Perverse, Leo Katz, Frank Carano Professor of Law at the University of Pennsylvania Law School, examines features of the legal system which seem to not make sense on some level.

I admit that I offered to read and review the book based on the title. I’m not sure that Professor Katz makes the case that the law is perverse. He does show the complexity and the complexity in human decision-making in the legal system.

The better title would be the Impact of Multi-criterial Decision Making in Legal Analysis. I suppose that title is not quite as catchy.

That title is more closely aligned with the style of writing and content. For me, the book was like stepping back into law school and analyzing choices and consequences of actions in the context of legal decision making. That means there are some interesting puzzles and thought exercises. It also means that it’s a bit disconnected from the real world.

Two disclosures. First, the publisher supplied me with a free copy of the book. Second, some of the statements in the book left me bitter with the way Professor Katz characterized the legal profession. The most notable was:

The exploitation of loopholes is in fact the lawyer’ daily bread, which makes it all the stranger that both lawyers and non‐lawyers profess such outrage about it. Actually, the point should probably be put the other way around: What is strange is that, given the contempt in which loophole exploitation is held, it is nevertheless central to legal practice. What can a profession say for itself whose main preoccupation consists of this kind of activity?

I don’t know any lawyers who get excited looking for loopholes, or who would even call their daily practice exploiting loopholes. On the criminal side, it’s all about the evidence and culpability. On the business side it’s about trying to figure out what the government will allow and not allow. The law is complex and the decision-making is difficult, but that doesn’t make it perverse and doesn’t make the lawyer’s job one of merely searching for loopholes.

In a whimsical example of a loophole, Professor Katz uses children cutting in line. According to playground law, line-cutting requires the consent of the party who will be immediately behind the cutter. So you can let someone cut into the line in front of you, but no backsies. The loophole is to allow the cut in front, then let the consenting party cut in front of you. A-Ha! A tremendous loophole. Professor Katz even parades a cartoon involving a playground lawyer to illustrate the point.

Where Professor Katz sees a loophole, I see a flawed law. It should either be cutting allowed or no cutting allowed. By allowing only one type of cutting, the law creates a distortion in behavior.

The law can be changed and flawed laws should be changed.

The central thesis is that the transitive law of math that we learned in elementary school (A>B and B>C, so A>C) only works with a single criteria and can fail once there are multiple factors in the decision-making: multi-criterial decision-making.

Besides loopholes, Professor Katz focuses on a few other “perversities.” One involves the law’s refusal to allow people to consent to certain things – prohibiting people from selling a kidney to a willing buyer or allowing criminals to choose torture instead of a long prison sentence. Legal decisions are essentially made in an either/or fashion—guilty or not guilty—but does not allow in-between verdicts. Legal systems don’t punish certain kinds of highly immoral conduct while prosecuting other far less pernicious behaviors.

Professor Katz contends, sometimes persuasively and at other times less so, that these thorny issues arise from their multicriterial’ character. If you miss law school, Why the Law Is So Perverse will take you back through some of the best and some worst features of law school.

If you’re interested, you can read an excerpt from Why the Law Is So Perverse (.pdf)

With the announcement of the Oscar nominees, try watching Margin Call to combine movie watching and compliance. Margin Call received an Oscar nomination for best original screenplay.

The movie sets Kevin Spacey, Demi Moore, Jeremy Irons, Stanley Tucci, and Simon Baker as the key players at an investment firm during the earliest hours of the 2008 financial crisis.

Tucci is the head of risk management for the mortgage trading desk, but gets laid-off in the first few minutes of the film. On his way out, he hands an unfinished project to a low-level risk analyst to find the problem. He finds it and it’s big. The holdings on the mortgage desk could lead to the downfall of the firm. that leaves it up to the firm’s employees on whether to save the firm at the risk of fleecing millions of investors.

Unlike Inside Job, Margin Call does not paint the characters as evil, mustache-twirling, robber barons. They’re humans staring at the face of a monumental choice. One choice is to hold and likely bankrupt the company. The other is to sell the garbage and likely being painted as a bad guy. They’re up all night thinking about the problem and trying to find a way out. Dawn comes and they all need to make choices.

Being a lawyer, I like a good legal thriller. If you’re looking for a legal thriller to keep you up at night, try William Landay’s latest novel: Defending Jacob. Jacob is a fourteen year old boy whose classmate is found murdered. Jacob’s father is an assistant district attorney. You can guess from the title that Jacob gets accused of the crime.

Before I go on, I should point out a few of my biases. I’m friends with the author. Our sons went to daycare and preschool together for many years. So I see bits and pieces of him and his family in the story. (But not that I think Bill’s son will grow up to be accused of murder.) I think I see flashes of Bill, his family, and the community in the book. Maybe that distracted me from the characters or maybe it made me like them more. I’m not sure.

Not being a trial lawyer, I can’t vouch for authenticity of investigative procedures or the trial. Again, with a title like “Defending Jacob” you would expect there to be a trial. You end up with the expected clash between the clash of guilty and not guilty against the question of whether Jacob actually committed the crime.

That’s what kept me reading chapter after chapter. Who was Jacob? Could he have committed the crime? Did Jacob’s father really know who he was? Facts quickly start being revealed, twisting the story through reveals and lies. It pushes the father, son, and mother to the edge until…

Defending Jacob should be on the bookshelf of your local bookstore on January 31 and is also available through Amazon.