Another year over, and what have we done? Once more, I muse philosophically on matters of risk and return, at annoying length (at least I cut out the footnotes this year). But first, perhaps, a little quasi-seasonal story:
The Great Homeopathic Cocktail Bar
December, as we all know, is the month when people who never go out, go out. All the cheer and goodwill and merrymaking is apt to render the pubs and dive bars more or less uninhabitable, and even the expensive places less than congenial. So it was lucky that I first came across the World’s Greatest Homeopathic Barman in the dour month of January, season of short pockets and long evenings.
The world was decidedly out of the party mood, but I wasn’t; memory fails me as to whether it was a horse or a South American republic, but I’d achieved a minor coup of the financial sort and was looking for somewhere to erase the sweet pain of all that money. Walking down Cornhill between the tube stop and the Leadenhall, I noticed that a new place had opened up on the site of an Irish-themed pub which had recently taken authenticity to extremes by going bankrupt. I shoved open the door and went in.
There’s a kind of sublime beauty to an unreviewed and poorly signed licensed premises, on a notorious graveyard street and newly opened in the worst month of the year. A small room can feel as empty as the Negev Desert at four o’clock on a Wednesday afternoon, you know, and this was only Tuesday. I was more or less the only thing in the place that hadn’t been sketched in by Edward Hopper, but hey ho. To have made a bolt for the door and somewhere with a fireplace would have seemed like kicking the place while it was down.
As so often in all manner of circumstances, I found myself deciding on a course of action by pondering the maxim “What Would JK Galbraith Do?”. Since the answer is nearly always something like “written a couple of best-sellers, had a three-martini lunch with the President, then scooted off to his chalet in Gstaad to get some quality skiing in before dispensing bons mots at a party with Edith Piaf and a couple of Agnellis”, I find it strangely comforting to know that I don’t have the talent to do the right thing, and thus might as well please myself. By way of minor homage, I ordered three martinis, to arrive sequentially.
I’ll say this for the chap, his timing was excellent. As the glass collar round the top of the liquid extended, he began to pour. As the lemon peel made its first coquettish bump against my top lip, I could hear the sweet Latin percussion of the stirring-spoon. And as I put the empty glass down, the ring of crystal on zinc was answered within a semiquaver by the slightly heavier bump of a full glass of the same. Quite a trick to work out the speed at which I was drinking, particularly from a noncylindrical glass, and fast work to match pace with a thirsty young stockbroker (as I then was). Clearly, this was an attentive craftsman close to the height of his mixological powers. The actual drink, however, was filthy.
After a second and half way down the third, I decided to take an interest in why this might be the case. Not in a chemical or culinary sense, it was glaringly obvious what was wrong there. But rather, my curiosity was piqued by the sociological, psychological and hell, even political nexus of causes and effects which had brought this swill to my glass. You never know with these things, it might have an interesting root cause; I recall a particularly profitable operation in Brent Crude that had begun by politely inquiring of an Aberdonian trawlerman why he was not drunk. Expecting not much more than a gob full of acession-state-accented apologies, but in the general spirit of nothing ventured, nothing gained, I broke the monastic silence of the place.
“Young man”, I ventured (I was, it pains me to say, a bit of a knob in those days), “Let me first reassure you that I am not angry” (I had something of a combative face in those days). “But I am, however, curious, as to why you have just served me three glasses of undiluted room temperature gin, and I am sure that you must be just as curious as to why I drank them. Shall we compare notes?”
It was a conversational gambit designed to start things off on the right foot, the right foot being the one into which I had persuaded my shoemaker to install a steel toe-cap, the better to pursue advantage in crowded conditions on the Northern Line. But I was surprised to discover that the fellow’s consternation had little to do with fears of violent reprisal, but were mainly motivated by a sort of existential crisis of confidence.
Lukas, it seemed, had served mixed drinks with the best of them at the Paris Ritz, the Waldorf-Astoria and everywhere else on that circuit. But he’d jacked it in and taken up a defunct lease in the City, to follow a vision; the vision of bringing the crude pseudoscience of bartending together with the noble art of homeopathic medicine. The cocktail he had painstakingly constructed for me had been made from a base of gin, mixed with gin from a bottle which had once contained a drop of vermouth, and stirred assidously over gin from a bottle which had once contained a sliver of ice. Lukas had been up all the night before, pouring and re-pouring the gin, to ensure that these original ingredients had long since been rinsed away.
In principle, of course, this dilution and redilution ought to have raised the concoction to its apotheosis; a sort of divine essence of all the martini’s possibilities. In practice, the fact that I had unerringly identified the contents as warm gin, and rather cheap off-brand gin at that, had been a crestfalling experience and one that threatened to undermine the integrity of the whole concept. Of course the fact that I don’t believe in homeopathy or any of that horse-manure was no comfort to the man. The whole point of the sweet science of homeopathic bartending is that it’s meant to work even if you don’t believe in it. Lukas was at the point of questioning whether a series of articles in the Journal of Consciousness Expansion were really a sound basis for a business plan.
Now I hate to see a grown man cry for longer than eight or nine minutes, so I soon befriended the plucky little battler and encouraged him to “get back up on that horse”. Perhaps the homeopathic martini was a step too far for the early days – he should try easier cocktails and work up to it. So I had a homeopathic screwdriver – warm cheap supermarket vodka. A homeopathic daiquiri – warm cheap supermarket rum. All night we toiled, talking like brothers about everything and nothing; sadly none of the glassware survived our frequent bitter rages, but we found a supply of paper cups, apparently pilfered by the previous owners from a nearby McDonald’s. Until (and I maintain that this is how it happened – the intellectual property lawyers be damned) I had my inspiration.
We were on our third or fourth attempt at a homeopathic Manhattan. Lukas had lined up four identical bottles of supermarket scotch, labelled “Heritage Bourbon”, “Aromatic Bitters”, and so forth to indicate the molecules each had once contained. The drink was at the point of assembly when I drawled, with perhaps an elegant hint of slobber …
“Curious, isn’t it, that such a rigorously constructed homeopathic drink should be garnished with a whole maraschino cherry?”. Lukas looked at me with a wild expression, rather like that of Victor Frankenstein on being asked if he’d thought about switching power suppliers. In a flash, he had drawn back the offending cherry from its position immediately above my cup, hurled it onto the bar-top, pricked it with a needle and shaken the needle in the direction of the cocktail, from a safe distance of six feet. It was as brilliant a piece of improvised dilution as I’d seen in my life up to that point.
I sipped the drink. It was nectar. It was even cold.
Our celebrations were intense, of course, and ended in filth and in prison as these things often do. But a sensation had clearly been born.
I was but an infrequent visitor over the next six months – although Lukas considered me an honoured friend, I was inconveniently barred from the three surrounding streets for a short while, meaning I could only attend by the use of a helicopter. But I read the reviews and they were extraordinary. Critical opinion was not wholly favourable, true – a fair number of reviewers thought that The Great Homeopathic Cocktail Bar was a dingy hole serving paper cups of warm cheap spirits, and I could see their point. But the general consensus was that it was largely irrelevant whether Lukas was a master of gastronomic libations or a deluded nerk selling rotgut. It was something more important than that.
Whatever the merits of the actual drinks, it was said, the modern consumer was aching for a bartender who would provide a personal connection and recognise them as an individual, rather than simply churning out formulaic remedies to their symptoms. And Lukas was good at that – he had a pair of those dark, searching soulful eyes that are described as “almost human” when they occur in spaniels. And, of course, the patrons appreciated the way in which he rendered himself vulnerable to them, simply by the act of serving such terrible drinks. At any point, a stag party from Liverpool or somewhere might have blown into the bar, not realising they were in the presence of greatness, and trashed the place in angry disgust. Punters appreciate it when a man lays his neck on the line to that extent.
As time went on, however, the novelty faded, and the dog days of the summer holidays were not kind to Lukas and his Great Homeopathic Cocktail Bar. Things in fact reached such a pass that one day in August, while dancing an improvised celebratory jig down Cornhill in recognition of a triumph in the Ashes (or in the collateralised debt market, I forget which), I found that the bouncers which had previously been placed outside Lukas’ door to beat back the baying crowds had instead grabbed me by the scruff and chucked me in. The place was cavernous once more, filled with only a few local alcoholics, their numbers bolstered by half a dozen tourists who had read an old Time Out in a bus station and thought the place was still fashionable. Even I could see that it wasn’t.
The problem, of course, as the host confided to me over a lachrymose whisky-sour, is that the provision of a humane, personal, individual connection is something that really doesn’t have much in the way of economies of scale. In order to pay the ground rent, Lukas needed to shift X glasses over the bar per evening, and when divided by X, the amount of time provided by the licensing hours made it more or less impossible to give each homeopathic beverage more than about a minute and a half. “How do you engage with a holistic individual, in ninety seconds?”, he pleaded.
To ask the question is to answer it, of course, and I think we came up with this one independently at the same time (as I have later testified under oath). The problem was one intrinsic to homeopathy, and thus it must have a homeopathic solution. And because it was a very serious homeopathic problem, the solution would have to be correspondingly weak.
Henceforth, Lukas would make fleeting eye contact with one customer, for about half a second, every third alternate Wednesday if there was an R in the month. This would be the sole and total extent of his personal consideration of them; otherwise they were to be treated strictly as an undifferentiated mass of service units. Diluted in thus fashion, the human engagement and involvement of his service would be unimaginably powerful.
Well, I don’t need to tell you what a success that was; if you were around in London, and maintained even the most casual interest in the nightclub scene, you’ll remember it. All through the autumn, he packed them in, and the Christmas party season was looking amazing. What with one thing and another (and a short but vigorous argument with one of the bouncers, who was later deported for unrelated reasons), I didn’t get back there myself until the shortest day in December. And thank God I did.
Any bar in the City is going to be pretty unpleasant in the last week before hols, and a fashionable one serving paper cups full of warm spirits more so than most. It was heaving, crushed, shoulder to shoulder and cheek to jowl. I hopped on my left foot and kicked shins with my right, and eventually hacked out a path to my favourite spot at the bar. Everything was about as merry as it was disgusting, but Lukas was stressed to breaking point and clearly in pain. He was leaping about, pouring drinks three at a time, desperately trying not to make eye contact with anyone.
It couldn’t last, of course – have you ever tried to simultaneously avoid the gaze of two hundred people, all of whom are trying to catch your eye? And when it did, my god, it was awful. The crowd turned, like a mobbing of crows, angrily waving their suddenly-disgusting cocktails. Thank heaven Lukas had the luck or foresight to have continued serving his drinks in paper cups, because if that lot had glass in their hands, I doubt he’d have lived. Like the man of action I sometimes am, I rushed back and bustled him out into the bar kitchen. Here was a man in dire need of a pep talk.
“Lukas!” I shouted, grasping his lapels for emphasis and kicking his shins to shut him up. “Your customers are furious! How much do you care about your customers, Lukas?”
“I care!”, he sobbed unattractively. “I care so much! Homeopathic drinks are my life! I care so, so much about those people”.
“No, you’re not listening”, I growled. “How much do you care? How much passion do you have? How much do you care?”
“I really, really care!” The tears and snot were flying in all directions, in distinctly more than homeopathic quantities.
I lost all restraint and started shaking him. “HOW MUCH DO YOU CARE, LUKAS? HOW MUCH DO YOU CARE?!”. A paper cup flew through the open door and hit him in the face. It appeared to be full of warm spittle.
Thankfully, the penny dropped shortly before he lost consciousness. Possibly he understood what I meant; perhaps the paper cup broke his will. Either way, he did that Baron Victor stare again, and hissed:
“I hardly care at all! I once cared, but now I am almost completely indifferent! I COULD NOT POSSIBLY CARE LESS!”
Have you ever seen a crowd go from friendly, to violent, and then just like that, back to happy again? Astonishing. The pressure-wave of concentrated bonhomie had us both grasping onto the fittings for support. By the time I left they were singing songs in his honour and chanting his name.
Obviously, it went from strength to strength since then. The concept got franchised to death of course – I hear that there are chains of bars all over the MidWest serving warm, half-diluted cocktails to rapturous customers. Lukas, professional to the last, takes infinite pains not to find out about them or to display more than an atom of interest in their management or standards. You might have been to one without knowing it.
And as I’ve mentioned, there’s a fair old amount of litigation going on – a private equity fund made a homeopathic investment, and there was some disagreement as to whether this meant they put up a hundredth of a penny and got 90% of the equity, or vice versa. Every now and then Lukas’ firm of homeopathic lawyers ask me for a witness statement; I write the letter “e” in the top corner of a large piece of paper and it seems to satisfy them, but I really honestly want no further involvement, even if it means sacrificing my due credit for nearly all the crucial innovations. I’m just happy to know that if a little knowledge is a dangerous thing, then I’m probably the safest man in Europe.
Well, after reading that I think you can agree that we’re all 2800-odd words nearer our deaths. But is there an important point to be made here about the nature of risk and reward? Probably not, but there’s a sort of semi-attached one.
Which is related to this piece of sterling common sense from Phil Edwards, proprietor of the gaping silence blog. It’s a psot targeted at “craft beer”, which is related to a point I’ve made myself in the past – that beer and whisky, unlike wine, are industrial products rather than agricultural ones, and that small-batch production of either is a very modern development of somewhat questionable sense.
But I think I’d like to take this for the time being in a somewhat different direction, one which is rather at a tangent to Phil’s cultural point, and one which, Mr Angry commenters may be pleased to hear, probably doesn’t involve mentioning Budweiser all that much. Instead, consider Guinness, the pre-packaged, industrially brewed pasteurised commodified nitrokeg beer that somehow gets a free pass from ale enthusiasts.
Now, Guinness is beloved to statisticians, of course, for inventing the t-distribution. And it’s worth thinking about why it was that a turn-of-the-century brewery would be interested in the ratio of the a normally distributed variable to the square root of a chi-square distributed variable divided by its degrees of freedom. And the answer, of course, is that William “Student” Gosset was responsible for quality control in the Guinness brewery, and thus was very much in need of a distribution which would tell him exactly how significant the variations were in the characteristics of his various samples, and whether they indicated an underlying problem.
The development of the science of quality control in the twentieth century is really interesting, and another example of a road not taken by economics, but that’s not really my point. The point I’m currently interested in is that many of the things which people think about in terms of “risk management” are actually problems of quality control.
The reason that shifting your thinking from “risk management” to “quality control” is an interesting thing to do is that it gets you away from a creeping cultural assumption that risk is in some way related to return. This is in fact, as Eric Falkenstein keeps proving, not even true in its paradigm case, the stock market – more or less however you measure it, high risk shares have lower average returns, not higher. Eric has a complicated theory of why this might be the case, involving benchmarking and the role of institutional investors, but I think it’s simpler than that – it’s just that the main source of risk in the world is mistakes, that a “high risk” share is one that has a lot of bad surprises happening to it, and that it’s not particularly complicated to understand why a prevalence of mistakes and bad surprises isn’t correlated with higher returns.
Consider booze once more; the (possibly fictitious) barman in this article (via Unfogged comments), the basis for Lukas in my story, doesn’t sell “industrial liquor” – he refuses to stock any brand that produces more than a thousand cases a year. What can we say about a distillery that operates on that scale? Well, that unless it is superlatively well-run (and in many cases even then), it is going to see considerable variation in the taste of its product from batch to batch.
It is logically possible that this variation might be a good thing – that each case of liquor will taste wonderful in a distinctive and separate way. But it’s massively more likely that any such variation is going to take the form of some batches being of inferior quality. The risk is wholly skewed to the downside, which is why even small brewing and distilling operations take the utmost pains to eliminate batch-to-batch variation – and of course there is an economy of scale here, because the cost to Diageo of throwing away a single poor-quality distilling run is proportionately much smaller than to a micro-scale producer.
Of course, dogmatism about the superiority of industrial product is just as silly as dogmatism about superiority of craft production. In some cases the random variation really can be a good thing. There are such things as vintage years in wines, and it is possible for improvised music to deliver things that composed music really doesn’t. But they’re very much the exceptions; as someone who listened to a lot of heavy metal in the 1980s, I can report back that the improvised guitar solo is not necessarily a thing of wonder; in general, a lot of the problem with jazz is basically one of quality control.
I think everyone can see where I’m going with this; to the wider point that Frank Furedi and similar commentators are right to say that over the period since the war, modern society has become increasingly obsessed with risk reduction, but wrong to say that this is a bad thing. “Risk” is the risk that something bad will happen, which is why people want to get rid of it. And it is for the most part not correlated with anything good in any kind of straightforward way; if we all threw away health and safety regulations, we wouldn’t actually get a new Internet invented or a massive surge of freedom and well-being, we’d just get the occasional broken toe and bout of food poisoning.
And looking at the things that can’t be fitted into this model, and at the kinds of risks which really are related to returns, gives you more of an appreciation of what we actually really mean by risks. Silicon Valley entrepreneurs take great big risks with their livelihoods (and furthermore, take uninsurable risks), but notoriously, they tend to be absolutely obsessive about quality-control issues – they don’t take needless unrewarded risks. Not coincidentally, film stuntmen seem to make a similar distinction between the risks they’re taking and things which are quality-control issues; the guy who is about to jump his car over a flaming building will be mightily careful about the fitting of his safety harness.
And so there we are. I think perhaps a more practical bit of advice than you might find in The Black Swan is to a) recognise that this is an industrial world, and that most risks aren’t worth taking, but b) to recognise that the man who proposes to live off the public dole simply by virtue of owning a million dollars’ worth of treasury stock isn’t really morally all that far above any other kind of bludger, and so c) to take a few, well organised risks, with a clear view of the benefit that you anticipate from taking them, and d) be as tough as you can on the quality control. Happy Christmas, Eid, Hannukah, Kwanzaa, Yul, Diwali (actually that one’s gone), or whatever other Winterval you choose to celebrate, and here’s hoping that next year, whatever else it brings, will be slightly less full of avoidable mistakes than recent ones.