For Every Winner a Loser

London Review of Books

Vol. 46 No. 17 · 12 September 2024

It is easy​ to misunderstand what contemporary finance is and does. Common sense, and the textbook, both say that finance is the business of moving money from A to B. There are times when money in place A, a saver’s bank account, say, would be usefully deployed in place B, a business needing cash to expand, or an individual wanting a mortgage to be able to buy somewhere to live. It’s easy to extrapolate from this that finance is mainly about supplying money to businesses and individuals that need it, as and when they need it. And modern finance does do that. But that isn’t what finance today is mainly about. In his indispensable guide to the current condition of the financial industry, Other People’s Money, published in 2015, John Kay talks about the state of the UK banking sector, whose assets then were about £7 trillion, four times the aggregate income of everyone in the country. But the assets of British banks ‘mostly consist of claims on other banks. Their liabilities are mainly obligations to other financial institutions. Lending to firms and individuals engaged in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3 per cent of that total.’

Lending money where it’s needed is what the modern form of finance, for the most part, does not do. What modern finance does, for the most part, is gamble. It speculates on the movements of prices and makes bets on their direction. Here’s a way to think about it: you live in a community that is entirely self-sufficient but produces one cash crop a year, consisting of a hundred crates of mangoes. In advance of the harvest, because it’s helpful for you to get the money now and not later, you sell the future ownership of the mango crop to a broker, for a dollar a crate. The broker immediately sells the rights to the crop to a dealer who’s heard a rumour that thanks to bad weather mangoes are going to be scarce and therefore extra valuable, so he pays $1.10 a crate. A speculator on international commodity markets hears about the rumour and buys the future crop from him for $1.20. A specialist ‘momentum trader’, who picks up trends in markets and bets on their continuation (yes, they do exist), comes in and buys the mangoes for $1.30. A specialist contrarian trader (they exist too) picks up on the trend in prices, concludes that it’s unsustainable and short-sells the mangoes for $1.20. Other market participants pick up on the short-selling and bid the prices back down to $1.10 and then to $1. A further speculator hears that the weather this growing season is now predicted to be very favourable for mangoes, so the crop will be particularly abundant, and further shorts the price to 90 cents, at which point the original broker re-enters the market and buys back the mangoes, which causes their price to return to $1. At which point the mangoes are harvested and shipped off the island and sold on the retail market, where an actual customer buys the mangoes, say for $1.10 a crate.

Notice that the final transaction is the only one in which a real exchange takes place. You grew the mangoes and the customer bought them. Everything else was finance – speculation on the movement of prices. In between the time when they were your mangoes and the time when they became the customer’s mangoes, there were nine transactions. All of them amounted to a zero-sum activity. Some people made money and some lost it, and all of that cancelled out. No value was created in the process.

That’s finance. The total value of all the economic activity in the world is estimated at $105 trillion. That’s the mangoes. The value of the financial derivatives which arise from this activity – that’s the subsequent trading – is $667 trillion. That makes it the biggest business in the world. And in terms of the things it produces, that business is useless. It does nothing and adds no value. It is just one speculator betting against another and for every winner, on every single transaction, there is an exactly equivalent loser.

The point bears repeating. There are other ways of getting rich, and in our society the classic three ways of making a fortune still apply: inherit it, marry it, or steal it. But for an ordinary citizen who wants to become rich through working at a salaried job, finance is by an enormous margin the most likely path. And yet, the thing they’re doing in finance is useless. I mean that in a strong sense: this activity produces nothing and creates no benefit for society in aggregate, because every gain is matched by an identical loss. It all sums to zero. The only benefit to wider society is the tax paid by the winners; though we need to remember that the losers will have their losses offset against tax, so the net tax benefit is not as clear as it might at first seem.

This, historically, is a unique state of affairs. Until now, most riches have been based on real assets of land or trade – often inherited rather than created ex novo, but no less real for that. This new form of riches is based on gambling. What does it mean about us that we reward so generously this work which does so little? What kind of society are we really? And what does it mean that we think about this so little? There was a brief moment during the pandemic when the question of valuable and worthwhile work was thrown into focus by the fact that the worst-paid jobs turned out to be the ones on which we all relied: retail staff, transport workers, delivery workers. We’ve done an excellent job of forgetting about that. At a societal level, this is unsatisfactory. To put it as mildly as possible, nobody would deliberately design a society that worked like this. But it turns out that the accumulation of near infinite riches based on zero-sum financial game playing has downsides for the winners too.

Every trade has a winner and a loser. Somebody makes money, and is therefore proved right; somebody loses money, and is therefore proved wrong. The binary nature of right or wrongness, repeated over thousands of transactions, confirms in many financially successful gamblers the feeling that they are right about everything. It’s not a question of being right more often than you’re wrong. It’s a question of being better than other people: right where others are wrong, clever where others are stupid, rational where others are emotional, insightful where they are blind, brave where they are timid, strong where they are weak. But awareness of superiority comes with a terrible sting, which is that the others don’t seem to see it that way. They see the riches, but think they are a matter of luck, or inequity, or unfair distribution of societal resources, or a bit of all the above. (For the record, I share that view.)

What to do? The answer is encoded in the problem. The problem is that finance is useless. The solution is to try and do something useful with the only thing it produces: the money it makes for the winners. Because gambling has no meaning, people who have made money through gambling have to find meaning outside the central thing they have done with their lives. Hence the importance of ‘philanthropy’ for the financial billionaire class. Their work has no meaning; meaning has to be found in what they subsequently do with the money they have made. For many of them, the most valuable single thing they can do with their riches is establish a reputation outside the world of finance which matches the image they have in their own heads. It is for this reason that so many people in finance, after achieving their fortune, become obsessed with wanting to be the thing they know themselves to be: a philosopher king. A spectacular example is Ray Dalio, whose story is excellently told in The Fund by Rob Copeland, a reporter at the New York Times who was formerly the hedge fund beat reporter at the Wall Street Journal.

Dalio is the founder and principal owner of Bridgewater, the world’s biggest hedge fund. He grew up in a working-class family in Manhasset on Long Island, and got his first break through connections he made while caddying at a local golf club for the Leibs, a clan with deep roots in New York money. The senior Leib took a shine to Dalio and set him up with a job on the stock exchange, which led him, via Harvard Business School, towards the world of finance. After a couple of false starts Dalio set up his own fund, Bridgewater Associates, in 1975. His first significant client was the employee pension fund of the World Bank, run by Hilda Ochoa-Brillembourg, who liked to make bets on up-and-coming young fund managers with something to prove. She ended up letting Bridgewater go, because ‘for all Dalio’s grandiloquence, the trades that Bridgewater had recommended for the World Bank were essentially just bets on whether interest rates would rise or fall’ – but it didn’t matter, because now Dalio and his fund were off and running.

The distinctive thing about Dalio was not his investing style. His hedge fund, like pretty much all others, tried to guarantee positive returns irrespective of the direction of the stock market, and did so by creating a mix of bets which was supposed to profit whether the market went up, down or sideways. The rhetoric – Dalio claimed to have found ‘the Holy Grail of investing’ – never really matched the reality. His funds had good years and bad years. He was hugely helped by high-profile successes in moments of general market downturn. In 1987, the year of Black Monday, when the Dow Jones index dived 22.6 per cent in a single day, his fund was up 27 per cent for the year. (Less well known than the fact of the crash is the fact that despite it, the Dow ended the year 2.3 per cent ahead of where it began.) In 2008, the year of the credit crunch, his Pure Alpha fund was up 9 per cent, while the index had its worst ever year and was down 34 per cent. These spectacular moments helped conceal the fact that, much of the time, the funds charged high fees in return for very ordinary performance. In many years a bog standard, more or less fee-free index-tracking fund outperformed Bridgewater’s funds. In the eleven years from January 2012 to December 2022, Bridgewater’s Pure Alpha fund rose by 17.8 per cent. You might think that sounds OK, but over the same period the S&P 500 (the biggest standard index used by investors) went up by 273 per cent. A Wall Street Journal investigation in 2020 found that in seven of the eleven previous years, Bridgewater’s flagship fund was outperformed by the most standard (and cheapest) off-the-shelf investment portfolio you can find, a 60/40 split of equities and bonds.

What was distinctive about Dalio wasn’t his investment performance, but the amount of noise he made. Right from the earliest days of his career, he published a daily – not weekly or monthly, but daily – newsletter, broadcasting his views on market trends, developments and historical patterns. His specialism was predicting huge market downturns, which he did with a regularity that didn’t waver in response to the fact that the crashes kept not happening. In front of a Congressional committee in 1982, for instance, he said: ‘Following the economy of the last few years has been rather like watching a mystery thriller in which you can see the dangers lurking around the corner and want to yell a warning but know it won’t be heard. The danger in this case is depression.’ That was the point at which the market began the long boom of the Reagan years. ‘He’s called fifteen of the last zero recessions,’ a colleague joked – though as it turned out, the joke was on everyone else, because when the market did turn, Dalio had been so loud and so consistent in predicting crashes that instead of being seen as the proverbial broken clock, he was hailed as a prophet. The combination of publicity and occasionally successful big bets (in the context of pretty routine overall performance) made Bridgewater by March 2009 the biggest hedge fund in the world, measured by assets under management.

Dalio​ became more and more preoccupied with establishing a reputation as a guru. He talked often about Bridgewater’s ‘Principles’, a set of obiter dicta he had established over the years, which codified the rules for what the New Yorker’s John Cassidy called ‘the world’s richest and strangest hedge fund’. The idea was to create a culture of radical candour. All of Bridgewater’s employees were supposed to give one another constant feedback. Especially negative feedback. One Principle was that ‘No one has the right to hold a critical opinion without speaking up.’ It was forbidden to criticise anybody in their absence: you had to say everything straight to the subject’s face. Everyone at Bridgewater was given a tablet computer that they were supposed to fill with ‘dots’, positive or negative, giving constant ratings on every aspect of the company and their colleagues. The offices were full of cameras and sound equipment recording interactions between staff, all of it added to a Transparency Library, where it could be viewed by other members of staff, who would then provide feedback. Employees handed over their personal phones on arriving at work, and were allowed to use only monitored company phones; computer keystrokes were tracked.

The surveillance and feedback were put to use. Failings resulted in ‘probings’ or public interrogations, often led by Dalio, in which the employee would be grilled on what they had done wrong, in search of the higher truth – the deeper, underlying weakness – that had caused it to happen. Dalio had visited China and liked what he saw, so he incorporated into Bridgewater a system in which Principles Captains, Auditors and Overseers vied in supervising their application and reported to a body called the Politburo. Videos of employees being caught violating a Principle, then probed, then promising to mend their ways, were assembled and used to inculcate the Principles. One series of videos, of a senior colleague caught in a untruth, was called ‘Eileen Lies’. Another, in which a newly pregnant senior colleague was publicly humiliated and reduced to tears, was called ‘Pain + Reflection = Progress’. Dalio was so pleased with that one he emailed it to all of Bridgewater’s thousand employees, and instructed that a version of it be shown to people applying for jobs at the firm. Expressing too much sympathy for the victim was an excellent way of failing to be offered a job. ‘Sugarcoating creates sugar addiction’ was a Principle. One of Dalio’s visions was to have the Principles encoded into software so that Bridgewaterians who needed a steer on what to do could consult the oracle. The project took more than a decade, cost $100 million and never produced anything useful, mainly because the Principles, all 375 of them, are a load of platitudinous, self-contradictory mince.

On the face of it, this should be a darkly funny story, about vanity and delusion and – since it isn’t compulsory to work at Bridgewater – the horrible things people are willing to put up with in order to be rich. Molière would have had a lot of fun with Ray Dalio, especially with the scene where a down-on-his-luck grandchild of George Leib, the man who gave Dalio his first break, writes asking for a job. Dalio’s immediate reply?

If you are qualified for the job, then your resumé should stand on its own. I would not undermine the process of my HR deptip intoartment for anyone.

I would not even offer such favouritism to my own dog if my dog was applying.

The pomposity and amnesiac ingratitude are impressive on their own, but it’s the imaginary dog application that tips it into greatness.

Despite hundreds of exampompoaples of similar behaviour, however, Copeland’s deeply reported book isn’t funny. There’s a simple reason: all of Bridgewater’s systems were designed to ‘cascade’. When the fund’s internal ratings were set up, the highest value was established as ‘believability’, and believability descended from Dalio at the pinnacle. He is the benchmark for virtue and alignment with the Principles, and it follows therefore that this culture of radical candour and transparency and public interrogation/humiliation (and surveillance in pursuit of those aims) flows downwards. Criticism, candour and ‘probing’ is always directed by him rather than at him. Adulatory profiles – ‘although he has been called the Steve Jobs of investing, employees don’t communicate with him as if he’s anything special’ – caught the exact opposite of the truth: this was an institutionalised culture of bullying on a grotesque scale, created as a monument to a single individual’s vanity and delusion. As so often with the toxically vain, the biggest delusion of all is Dalio’s belief in his own humility. And all this in pursuit of no end except money making more money.

When he was giving evidence to the House banking committee about hedge funds in 1994, George Soros gave a concise definition of what they are, accompanied by a recommendation of what to do about them. ‘The only thing they have in common is that the managers are compensated on the basis of performance and not as a fixed percentage of assets under management. Frankly, I don’t think hedge funds are a matter of concern to you or the regulators.’ You can quibble with both parts of that – funds typically charge a 2 per cent fee every year, for a start – but, broadly speaking, I tend to agree. Hedge funds fail and go broke and close all the time, usually without any consequences other than for their investors, who can by definition afford it. Banks are different. They have an implicit guarantee from the state, and therefore the taxpayer, which means that what they do is very much our business.

The Trading Game is an account of what goes on inside those banks when they are at the work of ‘finance’, meaning gambling. It is a shocking but not surprising book, because Gary Stevenson’s account is essentially identical to the one critical outsiders gave of the banking system in the wake of the global financial crisis. It is especially shocking since much of Stevenson’s story is not set during the run-up to the crash, but in the aftermath – when lessons had allegedly been learned and behaviour reformed. It is clear from his book that those of us who talked about privatised gains and socialised losses were, not to put a finer point on it, completely right.

The​ clarity and frankness of The Trading Game come from Stevenson’s outsider perspective. He grew up in a working-class family in Ilford, with a distant view of the Canary Wharf financial centre where he would later go to work. He was kicked out of grammar school for selling marijuana – a racket he got into because his street had drug dealers, so the kids from posher neighbourhoods would ask him to buy dope for them – but thanks to his extraordinary talent for maths, gained a place at LSE. While there he won an internship at Citibank through a trading contest; he turned the internship into a job and before long was working as a trader in the department of FX swaps. These are financial instruments in which two parties agree to temporarily swap a loan in one currency for a loan in another, and the difference in respective interest rates is paid accordingly. I exchange my euros, which pay 2 per cent interest, for your dollars, which pay 0 per cent, and I pay you 2 per cent to compensate for the difference in rates. Why would I make that trade? Because I need dollars. There are many reasons banks and companies need dollars. Citibank, then the largest bank in America, had, via the US Federal Reserve, access to what amounted to an infinite supply of US currency. The trade of dollars for other currency was, Stevenson was told, ‘free money’: ‘The traders started making a million dollars a day, two or three times a week. The imminent bankruptcy of our own employer was of no concern to anyone. We all knew that we’d get bailed out.’

The FX swaps desk at Citibank, formerly something of a backwater, became one of the giant bank’s main sources of profit. Stevenson was in the right place at the right time, and had the right skills. His father worked for the Post Office and earned £20,000 a year. (Stevenson’s book is short on tender feelings, but one of its moving passages describes him getting up before dawn to wave through the window at his father as he took the early train from Seven Kings on his way to work.) In his first year at the bank, Stevenson was paid £36,000 and earned a bonus of £13,000. In his second, he was still being paid £36,000, but his bonus was £395,000. By his fourth year, he has stopped telling us the precise amount of his bonus, but it’s clear that the sum was in seven figures. He was staking huge and ever increasing amounts of the bank’s money, egged on by bosses who gave the traders baseball caps telling them to ‘Go Big or Go Home.’ Stevenson became, he tells us, Citibank’s most profitable trader. Banks talk the language of ‘risk controls’, but what we had here was billions of dollars being gambled every day by a 24-year-old.

To make proper money in finance, Stevenson explains, it’s not enough to be right. You need to be right at the same time everyone else is being wrong. Stevenson’s bets were based on his experience of life outside the finance bubble. After the crash, central banks were printing money in a frantic attempt to revive their economies. The idea was that this money would make its way from the banks that received the newly minted electronic money, out into the real economy in the form of a general economic stimulus. But Stevenson could see that everyone he knew outside the financial world was struggling. This is Stevenson’s exchange with an Italian colleague, Titzy:

‘Titzy. Do you think the reason no one is spending money is because no one’s got any money?’

‘What the fuck are you talkin’ about, geeza? How can no one have any money?’

His accent is deeply Italian. ‘Geeza’ is a new word that he’s recently learned and he’s trying it out.

‘Well, you know, I been askin’ people and that’s all they keep saying. “I don’t have no fuckin’ money.”’

‘I don ava no fuckina money.’ Titzy tries to copy my accent and somehow comes off sounding even more Italian. ‘Come on geeza. It’s a monetary system. It’s not possible for no one to have any money. The whole thing has got to add up.’

That is economic orthodoxy, as Stevenson was taught at LSE. What Stevenson saw in the aftermath of the crash was that the orthodoxy was wrong:

We had been diagnosing a terminal cancer as a series of seasonal colds. We thought the banking system was broken, but fixable. We thought confidence had collapsed, but would recover. But what was really happening was that the wealth of the middle class – or ordinary, hard-working families … and almost all the world’s largest governments – was being sucked away from them and into the hands of the rich. Ordinary families were losing their assets and going into debt. So were governments. As ordinary families and governments got poorer, and the rich got richer, that would increase flows of interest, rent and profit from the middle class to the rich, compounding the problem. The problem would not solve itself. In fact, it would accelerate, it would get worse. The reason economists didn’t realise this is because almost no economists look in their models at how wealth is distributed. They spend ten years memorising ‘representative agent’ models – models that view the whole economy as one single ‘average’ or ‘representative’ person. As a result, for them the economy is only ever about averages, about aggregates. They ignore the distribution. For them, it’s nothing more than an afterthought. Moralist window-dressing. Finally, my degree was useful for something after all. It showed me exactly how everyone was wrong.

A story about the outsider outwitting the insiders, about the boy from an unprivileged and difficult background outsmarting the boys who started with more advantages but less hunger and less talent – it might sound as if The Trading Game is a gleeful book. Instead it’s an angry and bitter account that confirms the view of the financial system held by its critics. It is also a story of trauma. After he makes his killing, Stevenson spends his bonus on a flat, not because he wants one, but because he knows that the rich – who are the beneficiaries of zero interest rates – put their money into assets, so assets such as property are about to surge in price. ‘That worried me, because I had just been given a shit ton of money, and I didn’t have a house, so I went and viewed some fancy apartment on some fancy marina just down the road from the office and I bid 5 per cent through the asking price and I went and bought it just like that.’ He rips out the walls, lights, sinks and loos from his new flat, and leaves it as an empty grey-white box, with a TV and a mattress on the floor. ‘And every day I’d wake up at 5.30 a.m., and then I’d read five hundred emails, right there, on the floor.’

Stevenson had stopped caring. He was transferred to Japan, and still didn’t care; he spent an excruciating period negotiating his departure from a highly reluctant Citibank. He was depressed and burned out; the only way of surviving his experiences would have been to turn into someone else, and Stevenson clearly didn’t want to do that. You finish The Trading Game unsure whether it is a story of victory or defeat. It is the ideal book to give to a young person contemplating a career in finance, because the way they answer that question will determine their view of what it’s like to be in that world. Stevenson is now a campaigner against economic inequality, whose highly informative (angry, bitter) YouTube channel, Gary’s Economics, has nearly 400,000 subscribers. If the meaning of what people do in finance is what they do with the money they make, Stevenson has chosen to find that meaning as a campaigner against inequality. He has chosen to bite the hand that fed him as hard and often as he can.

Dalio created the biggest hedge fund in the world, and Stevenson was the top trader at one of the world’s biggest banks; but the all-time number one champion of pure finance was Jim Simons, who died in May. Simons founded and ran Renaissance Technologies, a hedge fund whose Medallion fund, over a period of thirty years, averaged an annualised return of 66 per cent (before fees). That’s a hard number to understand: if you put in $10,000 and left it to compound at 66 per cent for thirty years, you would end up with $2.35 trillion. You would start out with enough money to buy a mediocre second-hand car, and end with enough money to buy Italy (current GDP $2.25 trillion). The only reason that wasn’t possible with Medallion was because the fund paid out its winnings every year, to cap its size – otherwise, it would grow too big to keep its tactics and technology secret. Oh, and the only people allowed to participate in Medallion were employees and former employees of Renaissance Technologies. These choices derived from Simons’s preference for staying well under the radar – which is probably the reason you have never heard of him, unless you have an interest in finance. But no investor, speculator, gambler or magician has ever come anywhere near the financial performance of Simons and his fund.

Discussing the final volume of his masterpiece The City of London, which deals with the period 1945-2000, David Kynaston has observed that the City people in that book are more boring than in earlier volumes because all they do with their lives is work in finance. Simons wasn’t like that: his life had the range of the old-school giants. Born in Cambridge, Massachusetts in 1938, he had a conventional, happy, maths-preoccupied childhood before going to MIT to study his favourite subject. After graduating at the age of twenty, he and some friends borrowed scooters and drove from Boston to Bogotá, where he later went into business as co-owner of a tiling company. Simons then went to Berkeley to do a PhD, attracted by the presence of the renowned Chinese American mathematician Shiing-Shen Chern. He finished his thesis in two years. It is called ‘On the Transitivity of Holonomy Systems’. According to his biographer, Geoffrey Zuckerman, Simons likes to define holonomy as ‘parallel transport of tangent vectors around closed curves in multiple-dimensional curved spaces’. In 1962 Simons moved back east to teach at MIT then Harvard, but became frustrated at academic low pay, so two years later left to work as a cryptographer at the Institute for Defence Analyses, a tributary of the National Security Agency, then as now the world’s leading employer of pure mathematicians. Simons had a real gift for code-breaking. He enjoyed the work and the extra money, but when the war in Vietnam broke out, he opposed American’s involvement, publicly said so and was sacked.

Simons had three small children and badly needed a job. (Zuckerman cites a mathematicians’ joke: what’s the difference between a maths PhD and a large pizza? A large pizza can feed a family of four.) SUNY Stony Brook, whose main reputation ‘was for having a problem with drug use on campus’, offered Simons a job as head of its maths department. He took the post in 1968, aged thirty, and it soon became clear that Simons, in addition to his abilities in his subject, was both a keen spotter of talent and an excellent manager – not a common triple package. Within ten years he turned the backwater into one of the leading maths departments in the US. He also carried on with his own work, and got back in touch with his former mentor Shiing-Shen Chern. Simons had made a breakthrough concerning curved three-dimensional spaces. Chern saw that the same insight could be applied to all dimensions. Their work was published in 1974 as ‘Characteristic Forms and Geometric Invariants’, containing a new idea that came to be called Chern-Simons invariants. This led to the development of a field known as Chern-Simons theory. In 1976 Simons won the Oswald Veblen prize for geometry, the highest award in the field.

This work has been consequential, and not just in mathematics. In 1995 Edward Witten, a physicist who is considered by some as the closest contemporary equivalent to Einstein, gave a conference paper in which he showed that five different competing versions of string theory were different forms of the same underlying mathematical structure, thanks to – trumpets, please – Chern-Simons invariants. This theory, M-theory as Witten called it, unifies all the various forms of string theory in a way that is mathematically deeply surprising and satisfying. It has been dominant, though still controversial, in the field of theoretical physics ever since. And it depends on the work of Jim Simons.

Having​ done all these things – cryptography, reaching the peaks of pure mathematical research, setting up and running a university department – Simons quit at the age of forty. He had an unscratched itch to do with money. He had always been intellectually interested in markets, and he had also straightforwardly minded not being rich, having from an early age noticed that the rich had things easier than the poor. But as Zuckerman says, ‘the odds weren’t in favour of a forty-year-old mathematician embarking on his fourth career, hoping to revolutionise the centuries-old world of investing.’

Renaissance Technologies, Simons’s fund, was based on his hunch that he could find a new way of making money in the markets. Hedge funds such as Bridgewater had as their raison d’être the ability to make money irrespective of market conditions – up or down, rain or shine. What was new about Simons wasn’t that ambition, but his intention of achieving it through a new set of mathematical techniques. His plan was to find mathematical patterns in the market: otherwise invisible signals in the movement of prices which revealed, and allowed him to anticipate, future movements in those prices. This was the diametric opposite of ‘fundamentals’ investing, in which an investor scrutinises a company in depth for information about what’s really going on in the business and allocates funds accordingly. Warren Buffett is the best-known, and richest, exponent of that school. Simons didn’t care about the fundamentals. He had no interest in the true value of a share or bond or commodity. He didn’t care where prices were going next week: he wanted to find a way of working out where they were going right now, today, and he wanted to get in and out and make his money. He planned to make not one or two big bets, but tens of thousands of small bets, and to come out ahead 51 per cent of the time. That’s all he needed: not to be right, just to be right most of the time.

Digression: a highly satisfying, bizarre and under-reported finding published on arxiv.org last year showed that this is exactly the same probability you get from tossing a coin. You may have been brought up to think that the probability of a coin landing heads or tails is exactly equal with every toss. That, amazingly, turns out not to be true. A coin flipped energetically and caught in mid-air is 2 per cent more likely to land on the side that was facing upwards the last time. The principles at work appear to be aerodynamic: airflow around the tossed coin makes it by a fine margin more likely to repeat the previous toss than to contradict it. (This was proposed as a theory in 2007, and confirmed by František Bartoš at the University of Amsterdam and 49 colleagues, who flipped 350,757 coins in the process./*https://www.lrb.co.uk/the-paper/v46/n17/john-lanchester/for-every-winner-a-loser#) By their own admission some of the richest people on the planet earned their fortunes on the basis of the same odds you get by tossing a coin.

To do that, as in a heist movie, Simons put together a team. As much as his mathematical genius, it was his skill as a Menschenkenner, a knower of people, that made the success of the firm possible. He avoided anyone who already knew about financial markets. The whole point was not to reproduce already existing investment wisdom. Instead his hires were PhD level mathematicians and physicists and computer scientists. The techniques Renaissance used are simple to summarise – looking for hidden patterns in price movements – but impossible to describe in detail, both because the maths involved were so complicated and also because Simons was obsessed with secrecy. If people knew what Renaissance was doing, its competitive advantage would disappear. It helped that it had an unmatchable way of assuring employees’ allegiance: exclusive access to the Medallion fund, the best-performing pool of investment assets there has ever been.

Financial markets are zero-sum. Renaissance was making money, so someone else was losing it. Who? There were diverse conclusions about this inside the firm. Simons thought ‘the manager of a global hedge fund who is guessing on a frequent basis the direction of the French bond market may be a more exploitable participant.’ One of his colleagues had another explanation. ‘It’s a lot of dentists,’ he said, identifying ‘a different set of traders infamous for both their excessive trading and over-confidence when it came to predicting the direction of the market’. Another Renaissancer had a third view. ‘We’re mediocre traders, but our system never has rows with its girlfriends – that’s the kind of thing that causes patterns in markets.’ One way or another, whether it was made from dentists or hedge funds or people who had just had a row with their girlfriend, Renaissance enjoyed unprecedented success by predicting and profiting from other people’s mistakes.

Since all this activity sums to zero, the social cost or benefit of Renaissance has to be found not in the firm’s activity but in what its participants did with the money they made. Simons stepped aside from running Renaissance in 2010 to concentrate on philanthropy. He gave between $4 billion and $6 billion to causes focusing on science and maths, and also made the largest ever single unrestricted donation to a university: $500 million to Stony Brook. He was a significant donor to the Democratic Party. There will presumably be more philanthropic actions to come, since Simons’s net worth at the time of his death was $31.4 billion. Of course, the dentists would have done something with their profits too, if they had made any, so it’s hard to be clear about the overall consequences for, you know, the rest of humanity.

The overall balance sheet of Renaissance, however, isn’t all about Simons. One of the two men who took over as co-CEOs when he retired, Robert Mercer, has been a lifelong supporter of libertarian causes. He doesn’t talk much and doesn’t explain himself, but Zuckerman’s The Man Who Solved the Market depicts him as a person whose brilliance in his specialist field is balanced by the idiocy of his simplistic, pull-up-the-drawbridge, dismantle-the-state politics. Mercer anointed Steve Bannon as his political mentor. On Bannon’s advice, he and his activist daughter, Rebekah, backed the alt-right portal Breitbart News, and the data analytics company Cambridge Analytica. Most important, he gave a lot of money to Donald Trump and has been credited as the most crucial of all Trump’s billionaire backers. ‘The Mercers laid the groundwork for the Trump revolution,’ according to Bannon, who was the person best positioned to know. ‘Irrefutably, when you look at donors during the past four years, they have had the single biggest impact of anybody.’ The Mercers encouraged Trump to hire Bannon, and were deeply involved in setting the tone for his first administration. As his Renaissance colleague David Magerman said, Mercer ‘surrounded our president with his people, and his people have an outsized influence over the running of our country, simply because Robert Mercer paid for their seats’.

I’m not sure if this counts as an irony. Perhaps it is too gloomy for that. But the fact is that the main impact on the world of Jim Simons, both a deeply brilliant man and a good person, was to make enough money for his Renaissance colleague to get Donald Trump elected president. That’s all just a consequence of what modern finance is, and of its grotesquely outsize role in the way we live now. It is easy to diagnose decadence in a society historically and geographically distant from us. It is harder to see at close range.

The article was taken from https://www.lrb.co.uk/

The publication link of the article is as follows: https://www.lrb.co.uk/the-paper/v46/n17/john-lanchester/for-every-winner-a-loser