Sunday, February 28, 2010

Risk Management

Today I've been thinking about risk, about gambling on an uncertain future. I've been reading an interesting book called Against the Gods: The Remarkable Story of Risk, by Peter Bernstein. It's about the historical, social and intellectual changes that transformed Westerners from oracle-reading, past-oriented fatalists into probability-calculating, future-oriented gamblers. So while I'm reading this I'm thinking about The Merchant, of course, since risk or "hazard" plays such a large part in the story.

But, being me, I also started thinking about life, and how we manage uncertainties. Superstitions work this way, especially in childhood. If I don't step on any cracks on the way to school, I'll pass my spelling test. Having succeeded in avoiding cracks, I may in fact sit down to my test feeling all calm and orthographically smug. Instant A! Past experience is also a useful indicator of future outcomes--not only my own experience, but that of my friends. If all my friends speed down a section of interstate without getting caught, I'm likely to do that, too. If one of them gets caught, I'll probably stop speeding--at least for awhile. These, however, are ancient ways of dealing with risk--they aren't scientific, or even future-oriented. They're mystical, passive. The future, in these two scenarios, is either determined by some murky, mysterious power that governs sidewalk cracks, or it's just a mirror of the past.  There's no gambling or calculation involved.

I'm kind of a risk-averse person, which is why I initially became an academic. The academy is where many riskophobes go to hide. Think about it--you're surrounded by people exactly like yourself, guaranteed a job for life (if you don't get culled from the herd, as I did) in a business that essentially hasn't changed since the nineteenth century. Not much there would appeal to gamblers--you can take risks, but the stakes are embarrassingly low.  In deciding to toil for six years in a well-endowed upstate New York library, making about ten thousand dollars a year (and even back then, this was peanuts), I wagered that I would never have to take any more risks ever!

Uh-huh. Although the odds against my getting denied tenure were quite low, given my publications and the success rates of people with identical track records, I nonetheless lost my job, because of...circumstances that weren't part of my initial calculations (academic politics). The devil, as they say, is in the details. Still, gambling-wise, I made the right choice. It should have turned out differently, but didn't. Similarly, one can live a healthy life, have no known genetic risk factors, and still get some horrible disease. Because, you know, sometimes you do get struck by lightning.

But these outcomes are rare. And we can't go through life acting like they're common, can we? That's called being paranoid, or hypochondriacal, or whatever. We have to believe that the future can be predicted with some reasonable certainty, or we'll never do anything. This is the modern way.

Nevertheless, some people remain confused by these issues of risk and probability, and opt for the old-fashioned oracle approach. This world-view survives in supermarket tabloids, wherein the end of the world, the devolution of species and the death of celebrities are regularly foretold with eye-catching, retro-look visual aids. For millennia, this was the way most people thought about the future--as something arbitrary, dangerous, a whim of the gods.

Btw., I still have one Weekly World News front page from a few years ago, which shows the Four Horsemen of the Apocalypse somewhere in Arizona. I'm pretty sure they just cropped out four of the original Magnificent Seven for the picture, and then made it look blurry. But it was still kind of cool.

Although any thinking person knows that the Four Horsemen have their ranch somewhere in Texas, not Arizona.

Anyway, the Bernstein book traces the mathematical history of probability theory--which I admit made me glaze over in parts, since I'm allergic to math--but eventually turns to the more interesting ways in which the mathematical concept of probability informed economics. (That's Pascal's Triangle on the right. I put it there because I'm totally impressed with myself for knowing what it is--a way of explaining odds.)

Because of probability theory, an insurance industry became possible. There was insurance in Will's day--had been for centuries, but it had been mostly unregulated and haphazard. In 1601, Francis Bacon introduced a bill in Parliament to regulate insurance policies, which were said to be "tyme out of mynde an usage amonste merchants, both of this realm and of forraine nacyons."

Will wasn't really interested in the nascent insurance industry--if Antonio had had insurance on his ships, none of the events in Act 4 would have happened--but he was interested in risk. As in so many of his plays, he here makes a clear distinction between old ways and new. The Venetians, as I've mentioned before, are New Men. They live in a multicultural city teeming with international commerce, and they are fully aware that there's money to be made in trade.  Global trade was primarily a maritime business, however, and the one thing that couldn't be predicted with any degree of certainty--then as now--was the weather.

The ancient Greeks were pretty hip to this problem, and--if we can believe the stories--didn't hesitate to sacrifice a kid or two to the wind gods when necessary.

Despite the considerable potential for weather-related ruin, Antonio considered his investments safe because they were diversified, spreading the risk over a larger space and time:

My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year;
Therefore, my merchandise makes me not sad.

And yet, they all failed--at least as far as we know in Act 3. Ironically, Bassanio learns of his friend's loss just as he has, in Graziano's words, "won the fleece," i.e., won the game, the girl, and all her money besides. Remember, he picked the lead casket, which warned that the one who chooses it must be ready to "hazard all he hath."  "Hazard," is a gambling word--it comes from the Arabic al zahr, which means "dice." Bassanio's risk paid off.

Or did it? After he receives Antonio's letter, telling him the the Jew is calling in the debt, he confesses to Portia that he hasn't been entirely honest with her:

...When I told you
My state was nothing, I should then have told you
That I was worse than nothing, for indeed
I have engaged myself to a dear friend,
Engaged my friend to his mere enemy,
To feed my means.

It turns out Bassanio hasn't "hazarded" anything at all. Antonio took all the risk. And in freeing Antonio from the bond, Portia will assume another kind of risk by acting the part of a man--the lawyer Balthasar.  Bassanio, beloved of both, seems pretty unworthy of all this hazarding, doesn't he? One has to assume that he's really good-looking, or something. Because he's neither as rich as Portia, as entrepreneurial as Antonio, nor even as witty as Graziano. He's kind of a cipher in this whole drama--rather like the lady in a medieval romance. Desired, but devoid of personality.

So what does Portia do? What any rich girl would do--she offers to throw money at the problem to make it go away:

Portia: What sum owes he the Jew?
Bassanio: For me, three thousand ducats.
Portia: What, no more?
Pay him six thousand, and deface the bond.
Double six thousand, and then treble that,
Before a friend of this description
Shall lose a hair through Bassanio's fault.

Although Salerio has said Shylock won't take money to "deface the bond," Portia is sure that her excessive offer will change his mind. Because, after all, he's a Jew. Only concerned with money.

In fact it's the Christians who see money as the means to win and prove love, and to solve virtually any problem. For Shylock it's not about money at all--it's about vengeance. Or as that old Visa commercial puts it:

Winning an heiress:  3,000 ducats
Avenging Yourself on an Enemy:  Priceless

Portia's generosity is an insult, really. She has no sense that anything else might be at stake, that it is precisely this prodigality, this expansive and reckless use of capital that Shylock finds abhorrent.

Shylock's understanding of capital is, well, pre-capitalist. He has no interest in global investments or risky ventures. He makes money on the risky behavior of others, but takes few risks himself. In the play, this fiscal conservatism is allied with his religion, which sees the Law in similar terms. You get back what you put in--an eye for an eye. Adherence to the Law defines the Jewish community.

Christians, on the other hand, are all about risk. Leaps of faith. Grace in excess of desert. Forgiveness, not justice. Mercy, whether deserved or not. Religious faith is an investment in the payoff to come, in the next life. Christians are banking on heavenly reward.

During the Renaissance, as Bernstein points out, people became risk-takers. They made perilous journeys to distant lands in hope of financial or spiritual rewards--the missionary industry also took off at this time. They took chances on cures, on machines, on new ways of understanding the world. The future, once opaque and burdened by the past, suddenly beckoned like those heavenly gates. For those with the vision, courage (or maybe foolhardiness) to venture into the unknown, anything became possible. 

And this new attitude, more than religion or even ethics, is what separates Shylock from the Venetians. He's yesterday's man, practicing yesterday's religion--the Old Law, like the old ways of managing risk, is outdated and morally irrelevant. The Venetians, despite their hypocrisy, are the wave of the future. They send their capital and their ideas out into the wider world, instead of keeping them locked up in the family safe. Jessica knows which way the wind is blowing--she's a material girl, who's ready to take that leap into the future.

Shylock, wary of change and unwilling to risk, is left to lament the passing of the old ways. In one sense, the fact that he's a Jew is only incidental. He's mired in the past, and that alone is enough to ensure his defeat.

Next:  The Courtroom Scene!


  1. Hey, Gayle, I noticed that someone cross-posted your risk management post on a very widely read special facebook page. Guess what you have a bunch of new eyes and readers!

  2. I'm not on FB anymore, but thanks for the plug. I'm behind on the blog this week--but I hope to post something today. This is the problem when I get a new novel I like--everything else falls by the wayside while I race through 400 pages in two days.