Seeing Tomorrow, I

Book review of Dembo and Freeman’s “Seeing Tomorrow: Rewriting the Rules of Risk”.

There is something breath-taking about the title of this book. The audacious title,  the equally audacious subtitle, and even the painting on the cover remind me of Peter Bernstein’s risk management opus, “Against the Gods”, a book that made Bernstein to risk management what Carl Sagan was to cosmology: a modern-day Prometheus who brought the fascinating story of a scientific discipline to the  understanding of mortals.

However, at just the second page of the Introduction, I was startled by a prosaic admission: “Even as this book was in preparation, one of the authors, who sold a house in 1994, watched in dismay as property prices…defied expectations and rose to new heights” -- weren’t these blokes going to teach us to see ‘tomorrow’?

Anyway, as with so many risk management books, this one  opens with an example of risk-taking gone wrong.  The authors pick on someone as big as they can get: George Soros, the man who broke the Bank of England. 

Apparently, naive George often makes the mistake of looking at the past to predict the future. “It is no use looking over our shoulder and assuming that we can find all there is we need to know”, says Dembo and Freeman.   Quite true, but quite unconvincing since the man you pick is several times wealthier than you and prides himself as being a philosopher of some calibre.  I do not quite think the circumstances and the mistake are quite as simple as what the book relayed.

Modern man, say the authors, is faced with far too many choices, and they have written the book to rewrite the rules of risk, calling approaches to risk ‘outmoded’ and ‘flawed’. 

They bring up a pausing image of what we all go through each time we come to a fork in the road and have to make a choice:

“…we are faced with a single, unique decision that will probably not be repeated or will only be repeated a few times. We need to make that decision despite the uncertainty the future brings, and we need to make it now.”

Do I buy this house? Do I take this job? Should I get this insurance? Should I sell these shares now?

The book is about a new risk-taking framework which the authors introduce to make use of a risk concept they call  ‘Regret.’  D&F say this framework is ‘no different’ from the system they use ‘to help the world’s most sophisticated banks manage their risks.’ The framework is focused on the future, with the past taking a backseat (though not ignored).

Towards the end of the Introduction, there is a brief excursion on the etymology of the word ‘speculator’.  Anyone familiar with  Benjamin Graham’s or Warren Buffet’s writings know what pejorative connotations the word ‘speculator’ can bring.  Everyone coming from reading Graham will want to be known as ‘investors’ and not ‘speculators'.’

D&F gives us an etymology of the word that might change our minds. ‘Speculator’ comes from the Latin ‘specula’ which refer to watchtowers ringing the boundaries of the Roman Empire. 

When guards in the watchtowers see danger coming (barbarian hordes, for example), they would send signal to the next specula, which in turn sends a signal to the next one, until the signal reaches Rome, which dispatches its legions.

A speculator was someone who ‘tries to see dangers in the future and acts on them.’

More in the next post.