The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies

Erik Brynjolfsson and Andrew McAfee WW Norton, 2014 Rapid technological change has become such a constant in our lives that it's easy to forget what the world was like before computers, the Internet and social media apps. Increasingly, these innovations are reinventing the economy and transforming corporations and the lives of individuals. Are these changes…

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Disruptive Business Models, Uber and Plane Crashes

Disruptive internet-based business models have upended traditional industries like recorded music, newspapers and retailing. The latest flurry of innovation involves start-ups that take a service traditionally provided by a regulated firm - such as a hotel or taxi company - transforming it into commission-paying transactions between buyers and sellers. Accessed via smartphone apps and 'regulated'…

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What JP Morgan’s release of VaR has in common with sex and computer viruses

In The Devil’s Derivatives, I tried to answer two questions at the heart of the financial crisis. Why did the trading aspect of banking (the ‘casino’) get to grow so big? And why did regulators allow that to happen? My answer hinged upon something called Value-at-Risk that gave bankers and regulators confidence that risks were measurable, were small compared to trading positions and could be controlled.

It’s now the twentieth anniversary of the invention of VaR at JP Morgan in the early 1990s, and I recently had the opportunity to speak with Jacques Longerstaey, who was one of its principal inventors.

The basic story has been told many times. Dennis Weatherstone, the English-born chairman of JP Morgan wanted to understand the risks of the bank’s fast-growing trading business. “At the end of the day, I want one number”, Weatherstone told Longerstaey and the risk team. The result was VaR.

What fascinated me was that in the fullness of time, Longerstaey was prepared to speak frankly about the real business context behind VaR. An explanation was needed because having invented what was seen as a sophisticated risk management tool putting it light years ahead of other trading firms, JP Morgan decided in 1994 to do something surprising. The bank put this valuable intellectual property in the public domain, publishing what it called the Riskmetrics technical document, which Longerstaey co-authored.

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