Chaos Kings Book Review
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CHAOS KINGS
Chaos Kings: How Wall Street Traders Make Billions In The New Age Of Crisis by Scott Patterson covers a lot of the same ground as the The Big Short by Michael Lewis and Nassim Nicholas Taleb books do about asymmetrical hedges against catastrophes that bleed small premiums day after day when the market is going up but will pay off huge when the market has a big drop.
Chaos Kings adds the more recent events like the flash crash and the covid-19 pandemic to the timeline with an added focus on Mark Spitznagel, author of the Dao of Captial: Austrian Investing in a Distorted World (a Riva-Tez recommendation) and hedge fund partner of Taleb, and with Bill Ackman hedge fund manager of Pershing Square, who would make 2.6 Billion dollars as the stock market crashed 30% in the early days of the pandemic only to then double down plowing back that money into the stocks that were down.
Ackman understood exponential spread and the non-linear math of compounding and would take to Twitter to implore President Trump to shut down the county for 30 days in the early days of 2020. Mark Spitznagle, the founder of Universa Investments, which was built for these moments of chaos, and built on the premise that a single large downturn matters far more than a long series of small gains, understanding that 1000 cut in half to 500 requires a 100% increase to get back to even, would also make 3 Billion dollars in a short amount of time.
In many respects, we still live in a linear world, distance time, and velocity, and our brains hardwired for linear find the exponential hard to understand, but technology and globalization have caused acceleration and the world to increasingly be exponential. Taleb predicted back in 2010 in the Economist that the world would face “severe biological and electronic pandemics, another gift from globalization. He would again write about it in Antifragile in 2012 and in a 2014 paper called The Precautionary Principle, would write “the tightly connected global system implies a single deviation will eventually dominate the sum of their effects. Examples include pandemics, invasive species, and financial crises.” The precautionary principle interestingly supports skepticism of both GMOs and untested vaccines.
The last couple of chapters veer a little bit into the climate change debate that doesn't seem to quite fit with the finance component of the rest of the book but overall I enjoyed this journey through the last twenty years of black swans and tail risk. We are a zero-risk society but also a sick society. We need risk to solve these problems. The world is getting weirder and we can expect more variance in finance and the events of the world at large. Chaos Kings helped me to understand what we have seen so far as well of what we can expect to see in the future. We cannot see the future but at least of the type of scenarios and the chaos they will bring.
Other topics mentioned - Thomas Friedman - Thank You for Being Late, Peter Turchin - Ages of Discord, The Turbulent Twenties, Adam Tooze - the polycrisis, Barbell investing strategies, Complexity theory, Austrian economics, Statistics vs dynamic models, Brian Eno, Yaneer Bar-Yam - Making Things Work: Solving Complex Problems in a Complex World, Blockchain and Insurance.
Our Assessment: A quick read and solid. B.