On JPMorgan and Risk

Fact: Humans underprice risk.

It’s why people sign waivers before jumping off bridges attached to rubber bands.

It’s why the most frequently occurring last words of accident victims are “watch this.”

It’s why there are credit cycles and bank failures.

It’s why we need seat belts, air bags, anti-lock brakes, roll cages, and crumple zones.

It’s why people live in San Francisco and along the hurricane-ridden coast and why we rebuild in those places after they’re destroyed.

It’s why we build nuclear power plants on earthquake fault lines.

We can’t stop ourselves.

There’s much to talk about about JPMorgan’s announcement of their trading loss, but for now, let’s stick with the fact that they underpriced the risk of the loss growing to be $2 billion and likely more.

Felix Salmon of Reuters noted, ” JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.”

I think that’s right.

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