Red-Blooded Risk: The Secret History of Wall Street

Principle IV: Money

In conventional analysis of risk, you can gamble for any stakes, monetary or nonmonetary. The study of risk is unrelated to the study of money. But as we saw in Chapter 1, the two are intimately linked. You can't ignite risk without money and you can't understand money without understanding risk.

The first point of similarity is there is a duality of money that corresponds to the duality of risk. We can earn trust, repay loyalty, reciprocate affection, and lend a hand—but not with or for money. Money is applied to only a subset of human exchanges. Inside the money economy, everything can be measured to a common scale—“Every man has his price.” Outside the money economy, things are not as simple or consistent. We cannot easily predict beyond the VaR boundary; we cannot easily plan beyond the money boundary. Nevertheless, these regimes are important, often overwhelmingly so—“Life is what happens while you're making other plans.”

People often underestimate the importance of nonmoney exchange. I'm not talking just about things money cannot buy—at least by popular saying—like love and happiness. We don't auction off military medals or admission to elite colleges. You apply for jobs; you don't buy them. Nonmonetary gifts, charity, bequests, and volunteer organizations represent a substantial portion of the economy. No doubt money can help you be a celebrity, or date one, but it takes some indirection. Similarly, an expensive lawyer might help you beat a criminal charge ...