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A game of bluff and bluster for extravagant reward

Gambler's Ruin is quickly explained: let us imagine some Buddhists started a casino. Unwilling to take unfair advantage of anyone, the management offers a game at completely fair odds: flip a coin against the bank and win a dollar on heads, lose a dollar on tails.

What will happen over time? Intuition suggests, and strict calculation confirms, two grim facts: the game is bound to end with the ruin of one party, and that party will be the one who started with less capital. Your chances in this world are proportional to the size of your bankroll: the house wins by virtue of being the house.

When you are up against other gamblers, therefore, relative depth of pocket becomes the overwhelming issue.

(...) that is where Gambler's Swank comes in.

John Law, the 18th-century Scottish inventor of modern state finance, began his life as a gambler. Travelling throughout Europe, he would arrive in a new city and take the best rooms. Splendidly dressed, tall and handsome, he would choose as his mistress the most exquisite local lady. He would then set up the game, at which he acted as banker, and win all the money of anyone who cared to play.

The card games of Law's time were much like the Buddhist coin-toss: based more on chance than on skill, they actually gave the banker only a modest advantage. How, then, did Law win so much and so often? Swank. His "front" - the clothes, the rooms, the mistress, the icy calm - made him appear supremely rich and thus indifferent to failure. His success stemmed mainly from the seeming limitlessness of his funds (...)

In finance, where capital - its size, its sources - is mysterious, gambler's swank reigns supreme. That, not the yardstick of fair remuneration, is the reason investors tolerate these gigantic salaries. Why should you smile when your fund manager tootles down the highway in his Bugatti Veyron? Why should you stake him to a marble-and-glass office and two weeks in Gstaad? Because he is playing a risky game on your behalf: a game of bluff as well as calculation.

Bluff can win... until.

I can only refer again to Nassim Taieb's books, discussed not long ago on ET.


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jul 4th, 2007 at 12:19:56 PM EST

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