Risk rules everything around me
“The greatest trick the Devil ever pulled was convincing the world he didn’t exist”
— Charles Baudelaire.
The last few weeks have been interesting in markets and it’s time for my (short) take :). The best take on this topic is Matt Levine’s Money stuff newsletter. My take is about risk which is core to finance. I highly recommend my favorite book on this topic – Pandora’s risk for an excellent introduction to risk and how to think about it. Risk in the finance world is always about loss of capital. At the end of the day, finance is about money and the golden rule of money is to never lose it 😂. Every financial transaction we undertake has a risk of capital loss. These last few weeks have been a crash course in counterparty risk (DTCC clearing et al).
Risk truly rules everything around us. In the modern world, we are conditioned to believe that financial transactions are riskless. This couldn’t be farther from the truth, every financial transaction carries the risk of loss. A simple transaction of transferring money via Venmo to your friend has multiple embedded risks! You, the initiator are taking on counterparty risk with Venmo as your counterparty – what if Venmo just disappears with your money? Venmo has counterparty risk with your bank – what if your bank never gives Venmo the money? Venmo is taking fraud/sanctions risk with your friend – what if he takes the money and does something nefarious with the money? A simple transaction that we think is riskless carries with it a risk.
“The greatest trick finance ever pulled was convincing the world that risk does not exist”
A certain amount of risk hiding has been great for capitalism and society at large. if we were keenly aware of every risk in a financial transaction, we may never make any!
But has finance done too good a job of it?
Are we victims of our own success?