“The risk management objective function is survival, not profits and losses.”Nassim Nicholas Taleb
In terms of viewers, cricket is the second most popular sport in the world, after soccer, even though only eleven or so countries play it competitively. What makes it so uniquely compelling that spectators are willing to watch a single match over five days, knowing full well that the chances of a drawn match, with no winner or loser, are very high? It is one of the only sports in the world where so many matches end with no winner or loser, on a regular basis.
Batting in cricket is a unique skill. Unlike in baseball, a batsman only gets two chances in a match to bat. Depending on skill and luck, a single expert batsman could bat for one minute or for the whole day. A batsman could score 0 runs or over 200 runs in an innings. All this happens on a regular basis in cricket matches.
The difference between the career average per innings of a team’s best batsman and that of its worst is around 45 runs: 50 for the best and 5 for the worst. Despite all this, the scores for a whole team tend to average between 250 and 350 runs per innings.
Cricket batting involves the ultimate tail-risk management strategy of any act in any sport. One tiny mistake can be the difference between batting for eight hours or for one minute. One single mistake will wipe out all potential future profits. It is safe to say that cricket batting exists in a fat-tailed probability distribution, with negative Black Swans lurking in the left tail in the form of inswinging yorkers and deceptive googlies.
This extreme uncertainty, well beyond most other sports, is what keeps viewers glued to their television screens for days, on pins and needles. In baseball, soccer, basketball or golf, the sportsman gets repeated chances to make up for previous failures, and one mistake has only a proportional impact. In cricket batting, a mistake is all or nothing; even more so than in sports like figure skating and gymnastics, where one mistake, while destructive, may not be decisive. In cricket, one left-tail event, such as getting bowled, is decisive.
Because of this, a batsman’s technique is heavily loaded towards avoiding a complete wipe-out from one mistake. All of batting is based on managing, and bounding, left-tail risk: managing the Black Swan of being bowled or caught. Only those with superb defensive technique tend to have a long career as a batsman, even if their attacking skills are mediocre, while those with excellent attacking skills and a weak defence rarely make a career.
To a great extent, this takes physical strength out of the equation. Cricket batsmen are among the least physically gifted of all sportsmen. Compared with other athletes, they don’t run fast, don’t bench-press much, don’t have great stamina, don’t jump very high and don’t have low body fat. They are not physically efficient, and it doesn’t matter. Physical efficiency is the deciding attribute in “thin-tailed” sports like soccer and basketball, where players can take repeated risks and make repeated mistakes, because a single mistake will not wipe out the whole portfolio; only a long string of accumulated mistakes will.
In the fat-tailed world of cricket, it’s all or nothing. The only thing that counts, significantly above and beyond physical efficiency, is the hand-eye coordination, mental discipline and concentration to manage left-tail risk: not to get wiped out. Do that long enough, and the batsman’s lucrative attacking portfolio builds, slowly, on its own.
There is a lesson in this for banks. In the fat-tailed world of finance, risk management is not about profit and loss. It is about survival: ensuring a negative Black Swan does not wipe out the whole bank, even at the expense of limiting profits in the good days. This single modelling miscalculation, spread across thousands of financial institutions, is what caused the global financial crisis that began in 2007. Financial risk managers took repeated risks, like a basketball player, assuming a thin-tailed environment. They tried to outpace their competitors in growth, hoping to take advantage of the next positive Black Swan in the right tail, without first concentrating on bounding their left-tail risk.
Apparently, those who defined the financial risk models had never played competitive cricket. They didn’t realise they were playing a Test match, and relied on T20 skills to come out ahead. All seemed well until the negative Black Swan finally hit. The banks that had correctly bounded their left-tail risk, at the expense of benefiting from positive Black Swans, came out ahead, and ended up buying the banks that had relied on the opposite approach at far below market prices.
The lesson: survive at the crease long enough, through a watertight defensive technique, and the runs will accumulate on their own over time. It applies equally in every fat-tailed environment where one tail event can destroy all accumulated profits: cricket, finance and life in general.
My doctoral research explored these questions in depth; it became Antifragility of Islamic Finance. More on my work in banking technology.