Anyone who works on Wall Street senses the truth in Aaron Brown’s thesis, gambling is a fundamental brick in the foundation of economic and investment thinking.

Brown has done it all: poker player, options trading, risk and portfolio management and finance professor. He draws on this experience, using poker as a narrative spine; he weaves a tale of the crossroads between finance and gambling, economics and risk.

The resulting book is an insightful, thought-provoking, entertaining, yet frustrating. In many ways it is similar to the seemingly filling meal that leaves you hungry as soon as you burp.

For example, on page 96 Brown asserts that the Crash of 1987 was caused by under-priced exchange-traded puts which lead “people to invest in the stock market without assuming risk.” This is a unique and provocative interpretation on a subject in which I have a great deal of interest. The subject is dropped. Six pages later, it is re-introduced with the conclusion that “(f)or financial quants, the revelation was that risk has a price.”

How we got there, I am not quite sure. I have re-read the section several times and I am still puzzled. You have a long bull market. The public is buying calls and shorting puts. The professionals are doing forward and reverse conversions, which are tied to the money rate. The options trade where they trade, it seems to me. An explanation of how put pricing triggered a six sigma event is lost. It is an intriguing thought; worthy of exploration. Yet, it remains unexplored.

Another example: Brown assets that Hernando de Soto discovered in the lower Mississippi “the most sophisticated and successful preindustrial economy in the world.” Raw materials and finished good were distributed over an area of thousands of miles. It was done without money, writing, long-distance communications, common language or culture.

Brown takes a hunch and attributes it to gambling. Interesting, yet no support is offered. We know de Soto did not find Indian Casinos.

After reading page after page of abstractions, generalizations and unsupported conclusions, I got frustrated. The book rates four stars. Despite Brown’s inability to construct and articulate a cogent and articulate argument, he is on to something. Stock trading in Germany is regulated under that country’s gaming laws.

Brown is entertaining. Unfortunately, his book leaves, as the academics say, room for lots of addition research.

Penned by the Pointed Pundit
November 17, 2006
3:16:17 PM ( )