Trading in risk

The excellent essay aggregator The Browser linked this week to an essay by Steve Randy Waldman on the relationship between freedom and risk. It’s an interesting piece and well worth reading. I want to instead talk about the blurb that The Browser wrote to recommend it:

Learned essay on the contradictions between freedom and risk. We almost all want freedom, but few of us want to carry the risks that go with freedom. The history of finance is the history of attempts to lay off or mitigate risk: all of which are doomed to failure. The risk has to accumulate somewhere. And, as in 2008, it eventually blows up.

I know I shouldn’t take this too seriously—it is, after all, just a little hook to encourage readers to click on the link—but I think there are a couple of important things to mention.

I am extensively on record that economics is not the same thing as finance, but of course they are related. Let’s say for the moment that if we can think of economics as being about the allocation of scarce resources, we can think of finance as being about the allocation of scarce capital or money. At the core of economic theory is the idea of mutually beneficial trade: it is possible that we can trade resources and both be better off than before. More than that: a trade willingly entered into by two parties with good information on the things being traded seems almost tautologically mutually beneficial. If it doesn’t benefit both, why do it?

Now of course “good information” is important. For example, when you sell me a used car knowing that it is in fact a few miles away from becoming kaput, I may later be upset. Similarly, in finance, if my information on the riskiness of an asset is bad, I may be sad later, and not just in the sense of being unlucky. But the claim that “all [attempts to lay off or mitigate risk] are doomed to failure” is very peculiar. There are two problems here. The easy one first: clearly not all risks “eventually blow up”. This is the point of risk! If all risks eventually come to pass, then surely they are not risks but racing certainties.

The second problem is that where the risk goes matters. Naturally “the risk has to accumulate somewhere”; we cannot magic away risk by passing it around. But where does it end up? Can the trade of a risky asset be mutually beneficial? Yes: if you are more willing to bear the risk than I am, then you will be willing to part with more to buy that risk than I am willing to accept to sell it. You can buy that risk from me—assume it for your own—and we can both be happier. Think of unemployment insurance: for me to lose my job may be catastrophic. I will be destitute; this risk is very costly for me to bear. For an insurance company, the risk that I lose my job is trivial. The insurance company is happy to absolve me of (some of) this risk, and I am happy to pay them a premium to do so. We are both happy. Dare I even say that my freedom is enhanced when I can trade risk in this way?

So yes, the risk accumulates. But the idea behind all trade is that we might be able to send resources to the place where they are most valuable. And so it is with risk: if we can trade risk, perhaps we can have it accumulate in the hands of those to whom it will be the most bearable. While we do not eliminate the risk, we minimize the pain that is caused if the bad outcomes happen. Hey presto!

Of course there is fraud and lies and bad information, and of course some risks can aggregate into systemic kerfuffles, but let’s not throw the baby out with the bathwater. Trade in risk is not an inherently destructive activity.

The Master (2012)

“The Master” begins in much the same way as “There Will Be Blood” (2007), Paul Thomas Anderson’s previous film. We are painstakingly introduced to a man, alone, at length, before any of the other main players get their hands on him. Here the man is Freddie Quell (Joaquin Phoenix), a seaman who we meet at the tail end of the Second World War. There is no fighting. We see him carousing on a beach during downtime and drinking rocket fuel as the end of the war is announced. We follow him back to civilian life, as he drifts from job to job, continuing to concoct drinks from various chemicals and toxins, leaving a trail of alienation and injury. He is screened or treated for what we would now call post-traumatic stress disorder. Whether the war has shaped him in any way is hard to say; he is delivered to us as-is.

Finally, having poisoned a fellow farmhand with the latest of his invented intoxicants, he stows away on a ship full of wealthy revelers. Lancaster Dodd (Philip Seymour Hoffman) is in charge, and finally, having built Quell, Anderson can start to use him. Dodd introduces himself the morning after their offscreen meeting: apparently Quell had been belligerently drunk and offered himself as an able-bodied seaman in need of work; Dodd had discovered a flask of Quell’s homebrew and finished it up. Dodd, we piece together, is the aggrandizing, speechifying inventor of the Cause, a cult-like hodgepodge of self-help and mythos. Quell will become part of his broad entourage as they travel America drumming up support and enjoying the patronage of various adherents. For the rest of the film, then, we will see what Quell can do to this other man, and what can be done to him.

A wonderful key scene establishes the relationship between the two men. On the ship, Dodd offers Quell some “informal processing”, in which he will demand Quell’s concentration and pepper him with insistent questions about his past and his feelings. We learn, among other things, that years earlier a twentysomething Quell had abandoned his sixteen-year-old sweetheart Doris (Madisen Beaty) to go off so sea. Dodd bookends this hypnotic questioning by sharing long draughts of Quell’s brew.

In this way each man is armed. Quell’s booze is cobbled together from whatever he can get his hands on—fuel, darkroom chemicals, paint thinner. It is poison. We know that this poison can be dangerous—the farmhand of the opening—but it doesn’t hurt Quell and it doesn’t hurt Dodd. Instead Dodd relishes it, is fascinated by it. Dodd’s Cause seems much the same. He is accused at various moments of making it all up as he goes along, cobbling together mysticism and pseudoscience into a blend that is not oppressive but exploitative. The hope, optimism and yearning of the various adherents and patrons we meet is attracted to Dodd’s product. Perhaps it harms them as Quell’s drinks would. But Quell is immune to it.

Yet while each has a tool that is frustrated by the other, these two men are not equals. Quell, who seems to exist wholly in the past and the present, uninterested in conceiving of any future at all, can be diverted by the Cause, show an almost feline curiosity in the strange rituals Dodd puts him through, but he cannot be consumed or contained by it. He is a passenger. Dodd, by contrast, orients to the future. What is his next move? What will he have his people do next? What will he write? He snaps at an erstwhile patron at the launch of a new chapter in the lore of the Cause, seeming to feel the pressure of being backed into the corner of his own construction. The allure of Quell and his elixir is to be viscerally present, to be the kind of animalistic spirit that Dodd’s Cause seeks to suppress.

Why, at the heart of it all, do Quell and Dodd stay together? For Quell, maybe it is as simple as him having nowhere pressing to be. He endures plenty of humiliation and punishment with relative ease. Dodd, again possibly inventing on the fly, has Quell walk the length a room for hours on end; he has Quell endure, without reacting, taunts from Dodd’s son-in-law. These seem cathartic for Quell, but never does he change. Dodd disapproves of all of his attempts to “help” the Cause—again and again Quell visits violence on those who dare to be openly skeptical or obstructive to the Cause, and again and again Dodd scolds him, yet keeps him around. He again seems to be exactly the animal that Dodd rails against but seems fascinated by.

Perhaps this is why Peggy (Amy Adams), Dodd’s wife (seemingly the latest in a line) and the film’s maternal presence, is so wary of Quell. His approach to life is not just antagonistic to the Cause, but potentially damaging to her husband, and she seems fully committed to both in a way that Dodd himself is not. She demands that Dodd promise to drink no more of Quell’s hooch, no more of the corrosive stuff. She surely perceives what it is capable of: it renders Dodd under Quell’s power as others are under Dodd’s.

By the end it seems to me that in this meeting of two opposing forces it is Dodd who is broken. Dodd, his daughter and son-in-law, and Quell travel into the desert with a motorcycle. Dodd invents a “game”: pick a point and drive to it as fast as you can. He goes first, speeding off, speeding back. Quell goes next. He doesn’t come back. What point did he pick? He is gone. He goes back to the home of Doris, the girl he left behind years before, but she is gone, married with children now.

Later, Dodd tracks Quell down (or Quell dreams that he does) and asks him to come to England, where he has established a school. Quell had ridden free, yet he goes. Why? On his arrival, he is berated by Peggy and scolded by Dodd: how dare he have abandoned them? If he stays, he must commit to the Cause. If he leaves again, Dodd warns, he cannot come back. But Quell cannot be tamed this way. Dodd is powerless. Whether or not it was because of his relationship with Dodd, Quell has finally addressed something other than the present.

“There Will Be Blood”, Paul Thomas Anderson’s previous film, in retrospect had a relatively straightforward title. Here there are plenty of candidates for the title of Master. Quell or Dodd? The booze or the Cause? Who is in charge of whom?

Links: IMDb, Metacritic

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