CHAPTER 1: INTRODUCING RISK
sex-worker homicides: D. D. Brewer et al., “Extent, Trends, and Perpetrators of Prostitution-Related Homicide in the United States,” Journal of Forensic Sciences 51, no. 5 (September 2006): 1101–8.
“hope for economic success”: Rolf Skjong, “Etymology of Risk: Classical Greek Origin—Nautical Expression—Metaphor for ‘Difficulty to Avoid in the Sea,’ February 25, 2005, http://research.dnv.com/skj/Papers/ETYMOLOGY-OF-RISK.pdf.
sex using four years’ worth: Data was scraped from the Internet by a researcher who wishes to remain anonymous and was kind enough to share it with me.
prostitutes who work with pimps: Steven Levitt and Sudhir Venkatesh, “An Empirical Analysis of Street-Level Prostitution,” unpublished manuscript, 2007, http://international.ucla.edu/institute/article/85677.
Economists have estimated: Paul Gertier, Manisha Shah, and Stefano M. Bertozzi, “Risky Business: The Market for Unprotected Commercial Sex,” Journal of Political Economy 113, no. 3 (June 2005): 518–50.
estimated) and uncertainty: Frank Knight, Risk, Uncertainty, and Profit (Boston: Houghton Mifflin Co., 1921).
CHAPTER 2: REWARD
lower-calorie alternative: From interviews with Cole in 2016 and 2017.
CHAPTER 4: RISK MEASUREMENT
elaborate Excel spreadsheet: Chris Jones, “Ryan Kavanaugh Uses Math to Make Movies,” Esquire, November 19, 2009. https://www.esquire.com/news-politics/a6641/ryan-kavanaugh-1209/.
“making this investment”: Connie Bruck, “Cashier du Cinema,” New Yorker, October 8, 2012, https://www.newyorker.com/magazine/2012/10/08/cashier-du-cinema.
couldn’t be measured: Peter Bernstein, Against the Gods: The Remarkable Story of Risk (Hoboken, NJ: John Wiley & Sons, 1996).
conforming to this shape: Eugene Fama, “The Behavior of Stock-Market Prices,” Journal of Business 38, no. 1 (January 1965): 34–105.
all movies released: Data from Nash Information Services, http://nashinfoservices.com/.
the exact same shape: Arthur De Vany and W. David Walls, “Uncertainty in the Movie Industry: Does Star Power Reduce the Terror of the Box Office?,” Journal of Cultural Economics 23, no. 4 (November 1999): 285–318.
average horror movie: Estimated from data from Nash Information Services.
“Holy Grail” of Hollywood: Alex Ben Block, “Ryan Kavanaugh’s Secret to Success,” Hollywood Reporter, September 29, 2010, https://www.hollywoodreporter.com/news/ryan-kavanaughs-secret-success-28540.
between 13 percent and 18 percent: Tatiana Siegal, “Gun Hill Slate a Sound Investment,” Variety, October 14, 2007, https://variety.com/2007/film/markets-festivals/gun-hill-slate-a-sound-investment-1117974039/.
U.S. earnings of only $539,000: Benjamin Wallace, “The Epic Fail of Hollywood’s Hottest Algorithm,” New York Magazine, January 25, 2016, http://www.vulture.com/2016/01/relativity-media-ryan-kavanaugh-c-v-r.html.
reporter Ben Fritz: Ben Fritz, The Big Picture: The Fight for the Future of Movies (New York: Houghton Mifflin, 2018).
executive David Shaheen: From interviews with Shaheen and his team at JP Morgan.
CHAPTER 5: DIFFERENT TYPES OF RISK
economists William Sharpe and John Lintner: William F. Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,” Journal of Finance 19, no. 3 (September 1964): 425–42.
measured trends in American earnings: Fatih Guvenen, Sam Schulhofer-Wohl, Jae Song, and Motohiro Yogo, “Worker Betas: Five Facts About Systematic Earnings Risk,” American Economic Review 107, no. 5 (May 2017): 398–403.
tight job market: Craig Copeland, “Employee Tenure Trends: 1983–2016,” Employee Benefit Research Institute Notes 38, no. 9 (September 20, 2017), https://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=3497 [inactive].
CHAPTER 6: PROSPECT THEORY
“were off the hook”: Phil Hellmuth, Poker Brat: Phil Hellmuth’s Autobiography (East Sussex, England: D&B Publishing, 2017), 248.
Richard Thaler and Eric Johnson: Richard Thaler and Eric Johnson, “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice,” Management Science 36, no. 6 (June 1990): 643–60.
Economists at Pomona College: Gary Smith, Michael Levere, and Robert Kurtzman, “Poker Player Behavior After Big Wins and Big Losses,” Management Science 55, no. 9 (September 2009): 1547–55.
A later study: David Eil and Jaimie W. Lien, “Staying Ahead and Getting Even: Risk Attitudes of Experienced Poker Players,” Games and Economic Behavior 87 (September 2014): 50–69.
a morning gain: Joshua D. Coval and Tyler Shumway, “Do Behavioral Biases Affect Prices?” Journal of Finance 60, no. 1 (February 2005): 1–34.
than a loser: Nicholas Barberis and Wei Xiong, “What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation,” Journal of Finance 64, no. 2 (April 2009): 751–84, July 2006.
to loss avoidance: John List, “Does Market Experience Eliminate Market Anomalies?,” Quarterly Journal of Economics 118, no. 1 (February 2003): 41–71.
CHAPTER 7: RISK MISPERCEPTION
about $7 million: Barry Meier, “Crazy Eddie’s Insane Odyssey,” New York Times, July 19, 1992, https://www.nytimes.com/1992/07/19/business/crazy-eddie-s-insane-odyssey.html.
more than $60 million: Meier.
actually lost millions: Meier.
more than $65 million: Stephen Labaton, “S.E.C. Files Fraud Case on Retailer,” New York Times, September 7, 1989, https://www.nytimes.com/1989/09/07/business/sec-files-fraud-case-on-retailer.html.
1,600 additional traffic deaths: Gerd Gigerenzer, “Dread Risk, September 11, and Fatal Traffic Accidents,” Psychological Science 15, no. 4 (April 2004): 286–87.
Sociologists surveyed 1,354 teenagers: Thomas A. Loughran, Greg Pogarsky, Alex R. Piquero, and Raymond Paternoster, “Re-examining the Functional Form of the Certainty Effect in Deterrence Theory,” Justice Quarterly 29, no. 5 (2012): 712–41.
exercise in power: Paul Slovic, “Trust, Emotion, Sex, Politics, and Science: Surveying the Risk-Assessment Battlefield,” Risk Analysis 19, no. 4 (August 1999): 689–701.
deter much crime: Justin McCrary and Aaron Chalfin, “Criminal Deterrence: A Review of the Literature,” Journal of Economic Literature 55, no. 1 (March 2017): 5–48.
effective crime deterrent: Jonathan Klick and Alexander T. Tabarrok, “Using Terror Alert Levels to Estimate the Effect of Police on Crime,” Journal of Law and Economics 48, no. 1 (April 2005): 267–79.
can also be effective: Brendan O’Flaherty, The Economics of Race in the United States (Cambridge, MA: Harvard University Press, 2015), 362–66.
third-generation pills: Gerd Gigerenzer, “Making Sense of Health Statistics,” Bulletin of the World Health Organization 87, no. 8 (August 2009): 567.
people may not understand probabilities: Gerd Gigerenzer, Reckoning with Risk: Learning to Live with Uncertainty (New York: Penguin Books, 2002).
CHAPTER 8: DIVERSIFICATION
earnings at the racetrack: Jill Stowe and Emily Plant, “Is Moneyball Relevant on the Racetrack? A New Approach to Evaluating Future Racehorses,” Journal of Sports Economics, http://journals.sagepub.com/doi/full/10.1177/1527002518777977.
twenty thousand Thoroughbred foals: Jockey Club Foal Crop 2018n, http://www.jockeyclub.com/default.asp?section=FB&area=2.
explained by parentage: Devie Poerwanto and Jill Stowe, “The Relationship Between Sire Representation and Average Yearling Prices in the Thoroughbred Industry,” Journal of Agribusiness 28, no. 1 (Spring 2010): 61–74.
horse “speed gene”: E. W. Hill, J. Gu, S. S. Eivers, R. G. Fonseca, B. A. McGivney, P. Govindarajan, et al. “A Sequence Polymorphism in MSTN Predicts Sprinting Ability and Racing Stamina in Thoroughbred Horses,” PLoS ONE 5, no. 1 (January 2010): e8645.
in the last forty years: M. M. Binns et al., “Inbreeding in the Thoroughbred Horse,” Animal Genetics 43, no. 3 (June 2012): 340–42.
“the average Thoroughbred”: From interview with Binns.
stud fee was $500,000: Terry Conway, “Northern Dancer: The Patriarch Stallion,” America’s Best Racing, September 18, 2017, www.americasbestracing.net/the-sport/2017-northern-dancer-the-patriarch-stallion.
Northern Dancer was present: From an unpublished study by David L. Dink.
Northern Dancer’s sprint gene: Mim A. Bower et al., “The Genetic Origin and History of Speed in the Thoroughbred Racehorse,” Nature Communications 3 (2012): article number 643.
stayed flat until recently: Patrick Sharman and Alastair J. Wilson, “Racehorses Are Getting Faster,” Biology Letters 11, no. 6 (June 2015): 1–5.
less genetic innovation: Mark W. Denny, “Limits to Running Speed in Dogs, Horses and Humans,” Journal of Experimental Biology 211 (December 2008): 3836–49.
nearly half do: Estimated from data from the Federal Reserve Board’s 2016 Survey of Consumer Finances, https://www.federalreserve.gov/econres/scfindex.htm.
risk as well as return: Peter Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (Hoboken, NJ: John Wiley & Sons, 2005), 57.
risk and fees: Eugene Fama and Kenneth French, “Luck Versus Skill in the Cross-Section of Mutual Fund Returns,” Journal of Finance 65, no. 5 (October 2010): 1915–47.
race winner like Gun Runner: From interviews with Dr. Lambert.
smarter breeding choices: Based on interviews with Rogers.
genetics has the potential: Based on interviews with Hill.
CHAPTER 9: DE-RISKING
midwestern corporate executive: Tony Munoz, “Arnold Donald, President & CEO, Carnival Corporation & plc,” Maritime Executive, January/February 2017, https://www.maritime-executive.com/magazine/arnold-donald-president--ceo-carnival-corporation-plc.
“sales were at”: Aliya Ram, “Arnold Donald: ‘It Stopped Working Because the World Changed,’” Financial Times, January 8, 2017, https://www.ft.com/content/3201e790-9abd-11e6-b8c6-568a43813464.
chairman until 2005: Heather Cole, “Arnold Donald’s Sweet Deal,” St. Louis Business Journal, May 13, 2004, https://www.bizjournals.com/stlouis/stories/2004/05/17/story1.html.
colleagues from Monsanto were surprised: Ram, “Arnold Donald.”
“The absolute transformation”: Jon Pareles, “David Bowie, 21st Century Entrepreneur,” New York Times, June 9, 2002.
Bowie quickly asked: From interview with Pullman.
John Padgett from Disney: Chabeli Herrera, “How Carnival Revolutionized Its Guest Experience with Super-Smart Tech,” Miami Herald, January 8, 2017, www.miamiherald.com/news/business/tourism-cruises/article125317259.html.
and his team: Allison Schrager, “Can Carnival Possibly Make a Cruise with Thousands of Passengers Feel Personable?” Quartz, April 18, 2018, https://qz.com/1194838/carnival-ocean-medallion-a-disney-magicband-for-cruises/.
CHAPTER 10: INSURANCE
Fischer Black and Myron Scholes: Fischer Black, Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (May/June 1973): 637–54.
an option’s price: Robert Merton, “Theory of Rational Option Pricing,” Bell Journal of Economics and Management Science 4, no. 1 (Spring 1973): 141–83.
20,000 contracts: See “A Brief History of Options,” Ally Invest Options Playbook, www.optionsplaybook.com/options-introduction/stock-option-history.
4 million options contracts: Chicago Board Options Exchange, Annual Market Statistics, http://www.cboe.com/data/historical-options-data/annual-market-statistics.
than it prevented: Michael Mueller-Smith, “The Criminal and Labor Market Impacts of Incarceration” (unpublished working paper, 2015), https://sites.lsa.umich.edu/mgms/wp-content/uploads/sites/283/2015/09/incar.pdf.
CHAPTER 11: MORAL HAZARDS
“form of nightmares”: Greg Long, “Greg Long Recounts Almost Drowning,” Surfing Magazine, October 1, 2014, https://www.surfer.com/surfing-magazine-archive/surfing-video/greg-long-drowning/.
Merton enabled the widespread: Family history and discovery of jet skis as a safety advice from interviews with Brian Keaulana.
economist Sam Peltzman: Sam Peltzman, “The Effects of Automobile Safety Regulation,” Journal of Political Economy 83, no. 4 (August 1975): 677–726.
20 percent in 1997: The President’s Working Group on Financial Markets, “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management,” April 1999, https://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf.
finance new technology: William N. Goetzmann, Money Changes Everything: How Finance Made Civilization Possible (Princeton, NJ: Princeton University Press, 2017).
the trend reversed: National Highway Traffic Safety Administration, “Summary of Motor Vehicle Crashes,” August 2018, DOT HS 812 580.
RULE 5: UNCERTAINTY HAPPENS
the Knightian uncertainty: Frank Knight, Risk, Uncertainty, and Profit (Boston: Houghton Mifflin Co., 1921).
CHAPTER 12: UNCERTAINTY
“uniforms and boots”: H. R. McMaster, “Battle of 73 Easting” (manuscript available at the Donovan Research Library, Fort Benning, GA): 8, www.benning.army.mil/library/content/Virtual/Donovanpapers/other/73Easting.pdf [inactive].
“we had practiced”: McMaster, 12–13.
“until they surrendered”: McMaster, 20–21.
McMaster told me: From interview with McMaster.
“fog of war”: Peter Grier, “Preparing for 21st Century Information War,” Government Executive 8, no. 27 (August 1995): 130. Williamson Murray, “Clausewitz Out, Computer In: Military Culture and Technological Hubris,” National Interest, June 1, 1997, https://www.clausewitz.com/readings/Clause&Computers.htm.
minimizing downside risk: Colonel Arthur F. Lykke Jr., “Defining Military Strategy,” Military Review 69, no. 5 (May 1989): 2–8.
Clausewitz identified several factors: Carl von Clausewitz, On War, ed. and trans. Michael Howard and Peter Paret (1976; repr., Princeton, NJ: Princeton University Press, 1989).
“the last conflict”: Williamson Murray, “Thinking About Innovation,” Naval War College Review 54, no. 2 (Spring 2001): 122–23.
“ponderous English”: Meir Finkel, On Flexibility: Recovery from Technological and Doctrinal Surprise on the Battlefield (Stanford, CA: Stanford Security Studies, 2011), 206.
“the initial surprise”: Finkel, 2. Italics in the original.
The principles: Finkel, 1–17.