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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown

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Unspeakable Truth Number Two: There's Good Stuff beyond the VaR Limit

You already know that there's good stuff beyond the VaR limit, because you are a product of evolution, a process that operates beyond the VaR limit. But here I'm not talking about long-term benefits from short-term losses, nor things that are good for the population and bad for the individuals. I'm talking about using economic storms to accomplish things impossible in calm times. The secret is superposition. Superposition is a type of randomness in which a random variable takes all possible values at once.

I told you earlier about my Internet business eRaider.com to illustrate some principles of capital asset pricing theory. Now I want to consider the same events from a risk perspective.

The year is 1995 and everyone says Internet stocks are overpriced. For once, everyone is clearly right. So any red-blooded risk taker starts creating and selling Internet stocks. Of course, a lot of other people—not risk takers—created and sold Internet stocks as well. Some were technological visionaries, some were confused geeks, some were simple opportunists, and some were con artists—although artist implies some skill; perhaps “con fallers off of logs” would be more accurate.

What the risk takers understood was that the bubble would not continue forever. In round numbers, the NASDAQ stock index went up by a factor of 5 from 1995 to 2000, and then fell back to about the 1995 level in 2002. This understates the Internet bubble ...

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