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Michael Lewis: In Nature's Casino (How Wall Street is trying to quantify the risk of catastrophic weather)

11 points by toffer 19y ago

dpapathanasiou 19y ago
I'm a fan of Michael Lewis's writing, but this product placement is just ugly: She faxed the numbers to insurers, then walked to Au Bon Pain. Everything was suddenly more vivid and memorable. She ordered a smoked-turkey and Boursin cheese sandwich on French bread, with lettuce and tomato, and a large Diet Coke. Is the NYT so hard-up for revenues they're asking their authors to slip these in? I can't imagine Lewis wrote that on his own.
- jcwentz 19y ago
  > I can't imagine Lewis wrote that on his own. Of course he did. Ever since Ian Fleming, writers have been inserting brand names to add a sort of edgy verisimilitude.
- ctkrohn 19y ago
  The woman they're talking about said "everything was suddenly more vivid and memorable." Presumably the event was so important that she remembered trivial details around her that she normally would have forgotten. It happens to everyone.
falsestprophet 19y ago
more Seo spam...
- rms 19y ago
  Is someone getting optimized here other than the NYT? Their pagerank doesn't need much help.
  - falsestprophet 19y ago
    oh come on, the man's name was Seo
ctkrohn 19y ago
Yet another example of how derivatives are transforming financial markets for the better by transferring risk to those best able to handle it. It's also a great example of how mathematical and computer-driven models are helping us understand the world in practical ways.
giardini 19y ago
I have a problem with the example, which I quote at length: "An industrial company had called Lehman with a problem. It operated factories in Japan and California, both near fault lines. It could handle one of the two being shut down by an earthquake, but not both at the same time. Could Lehman Brothers quote a price for an option that would pay the company $10 million if both Japan and California suffered earthquakes in the same year? Lehman turned to its employee with a reputation for being able to price anything. And Seo thought it over. The earthquakes that the industrial company was worried about were not all that improbable: roughly once-a-decade events. A sloppy solution would be simply to call an insurance company and buy $10 million in coverage for the Japanese quake and then another $10 million in coverage for the California quake; the going rate was $2 million for each policy. "If I had been lazy, I could have just quoted $4 million for the premium," he says. "It would have been obnoxious to do so, but traders have been known to do it." If either quake happened, but not both, he would have a windfall gain of $10 million. (One of his policies would pay him $10 million, but he would not be required to pay anything to the quake-fearing corporation, since it would get paid only if both earthquakes occurred.)" "But there was a better solution. He needed to buy the California quake insurance for $2 million, its market price, but only if the Japanese quake happened in the same year. All Seo had to do, then, was buy enough Japanese quake insurance so that if the Japanese quake occurred, he could afford to pay the insurance company for his $10 million California insurance policy: $2 million. In other words, he didn't need $10 million of Japanese quake insurance; he needed only $2 million. The cost of that was a mere $400,000. For that sum, he could insure the manufacturing company against its strange risk at little risk to himself. Anything he charged above $400,000 was pure profit for Lehman Brothers." My question: Shouldn't the text instead read "Anything he charged above $2,400,000..."? Suppose the CA earthquake occurs _before_ the JP earthquake. After the JP earthquake the insurer receives $2M but it's too late to buy CA insurance on a past event. To use one policy to pay for another, the insurer must buy both policies at the same time. Otherwise the risk of an uncovered event would occur. It would be cheaper to merely buy $10M worth of either CA or JP insurance alone (but not both), since, certeris paribus, either would cost only $2M. Am I missing something?
- euccastro 19y ago
  I agree the reasoning sounds wrong, but the quote sounds about right. If insuring $10M for one earthquake costs $10M x 1/5 = $2M, insuring for two symultaneous ones should cost something around $10M x 1/5^2 = $400K. Another surprising thing in that example is that the guy says he could get away with quoting $4M? If insuring either factory for $10M (or insuring both for $5M) costs about $2M, I'd suppose that's the upper bound for a cost evaluation, even if you're lazy.

11 points by toffer 19y ago

I'm a fan of Michael Lewis's writing, but this product placement is just ugly: She faxed the numbers to insurers, then walked to Au Bon Pain. Everything was suddenly more vivid and memorable. She ordered a smoked-turkey and Boursin cheese sandwich on French bread, with lettuce and tomato, and a large Diet Coke. Is the NYT so hard-up for revenues they're asking their authors to slip these in? I can't imagine Lewis wrote that on his own.

jcwentz 19y ago
> I can't imagine Lewis wrote that on his own. Of course he did. Ever since Ian Fleming, writers have been inserting brand names to add a sort of edgy verisimilitude.
ctkrohn 19y ago
The woman they're talking about said "everything was suddenly more vivid and memorable." Presumably the event was so important that she remembered trivial details around her that she normally would have forgotten. It happens to everyone.

falsestprophet 19y ago

more Seo spam...

rms 19y ago
Is someone getting optimized here other than the NYT? Their pagerank doesn't need much help.
- falsestprophet 19y ago
  oh come on, the man's name was Seo

ctkrohn 19y ago

Yet another example of how derivatives are transforming financial markets for the better by transferring risk to those best able to handle it. It's also a great example of how mathematical and computer-driven models are helping us understand the world in practical ways.

giardini 19y ago

I have a problem with the example, which I quote at length: "An industrial company had called Lehman with a problem. It operated factories in Japan and California, both near fault lines. It could handle one of the two being shut down by an earthquake, but not both at the same time. Could Lehman Brothers quote a price for an option that would pay the company $10 million if both Japan and California suffered earthquakes in the same year? Lehman turned to its employee with a reputation for being able to price anything. And Seo thought it over. The earthquakes that the industrial company was worried about were not all that improbable: roughly once-a-decade events. A sloppy solution would be simply to call an insurance company and buy $10 million in coverage for the Japanese quake and then another $10 million in coverage for the California quake; the going rate was $2 million for each policy. "If I had been lazy, I could have just quoted $4 million for the premium," he says. "It would have been obnoxious to do so, but traders have been known to do it." If either quake happened, but not both, he would have a windfall gain of $10 million. (One of his policies would pay him $10 million, but he would not be required to pay anything to the quake-fearing corporation, since it would get paid only if both earthquakes occurred.)" "But there was a better solution. He needed to buy the California quake insurance for $2 million, its market price, but only if the Japanese quake happened in the same year. All Seo had to do, then, was buy enough Japanese quake insurance so that if the Japanese quake occurred, he could afford to pay the insurance company for his $10 million California insurance policy: $2 million. In other words, he didn't need $10 million of Japanese quake insurance; he needed only $2 million. The cost of that was a mere $400,000. For that sum, he could insure the manufacturing company against its strange risk at little risk to himself. Anything he charged above $400,000 was pure profit for Lehman Brothers." My question: Shouldn't the text instead read "Anything he charged above $2,400,000..."? Suppose the CA earthquake occurs _before_ the JP earthquake. After the JP earthquake the insurer receives $2M but it's too late to buy CA insurance on a past event. To use one policy to pay for another, the insurer must buy both policies at the same time. Otherwise the risk of an uncovered event would occur. It would be cheaper to merely buy $10M worth of either CA or JP insurance alone (but not both), since, certeris paribus, either would cost only $2M. Am I missing something?

euccastro 19y ago
I agree the reasoning sounds wrong, but the quote sounds about right. If insuring $10M for one earthquake costs $10M x 1/5 = $2M, insuring for two symultaneous ones should cost something around $10M x 1/5^2 = $400K. Another surprising thing in that example is that the guy says he could get away with quoting $4M? If insuring either factory for $10M (or insuring both for $5M) costs about $2M, I'd suppose that's the upper bound for a cost evaluation, even if you're lazy.