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9:00 AM EST, Wednesday, May 20, 2009. My brain is in mulling mode. I won't make a million but I won't lose it either. I'm looking at the contrasts (polite word) in the market -- the biggest one being we're in a recession and the stockmarket is going up. Try this one:

Online ad revenue now shrinking. For the first time since the dot-com bust, the U.S. online ad market is shrinking, including search. That's a stunning drop in growth from a year ago, when the market was still growing more than 20%.

The chart shows the quarterly revenue for the big four: Google (GOOG), Yahoo (YHOO), AOL (TWX), and Microsoft (MSFT).

In contrast, here is Google's share:

If I were a betting man, I'd say that Google's shares should be turning down any time soon.

Emergency Madness (and maybe insanity): When the history of the early 21st century is written, it will consist of a whole series of very dumb decisions made under the gun of perceived (and heavily exploited) emergencies. Such decisions include: eliminating the Glass Steagall requirement to permit commercial banks to enter investment banking, to relax the net capital rule for investment banks (which led to over-leveraging), invading Afghanistan and Iraq, encouraging ethanol, bailing out the banks,, encouraging loans to deadbeats, promoting outsourcing (and killing U.S.. manufacturers) and, most recently, running government deficits into the ionosphere. Email me any others you can think of. Then we can all feel depressed together.

The ultimate lesson is simple: When in doubt, stay out.

The primary lesson is more subtle: Be in doubt more often.

The overarching lesson is; Think more. Act less.

The Economist's new old book. In 2004, The Economist published this little book.

In between updating my dictionary and mulling the future of mankind, I've been reading it. After all, our present mess is largely due to a handful of idiots who took gigantic risks with other people's money in order to make themselves some short-term bonuses.

Here's an excerpt from the Shirreff's excellent Introduction (my bolding):

Ships are but boordes, Saylers but men, there be land rats, and water rats, water theeues, and land theeues, I meane Pyrats, and then there is the perrill of waters, windes and rockes. William Shakespeare, The Merchant of Venice, Act I, Scene 3

Antonio's first big mistake in The Merchant of Venice was to bet his whole fortune on a fleet of ships; his second was to borrow 3,000 ducats from a single source.

The first rule of risk management is to identify your risk. The second is to diversify it. Antonio broke the second rule, and his creditor Shylock flunked the first. He found he could not take his pound of Antonio's flesh without shedding "one drop of Christian blood": blood had not been specified as part of the bargain.

This is an unusual example. But it illustrates how financial risk management is just an extension of sensible prudence and forethought; to imagine what might go wrong and to guard against it.

Modern risk management has developed mathematics and other skills to narrow the field into bands of probabilities. It can never predict, it can only infer what might happen.

When did modern risk management begin? It was an extraordinary collision of extreme conditions in financial markets in the 1980s and a dramatic increase in computer power. In the space of a few years, outcomes which could be tested only by intuitive sketches on the back of an envelope, or worked out after weeks of cranky iterations on a calculator, were replicable in minutes on a desktop computer.

Monte Carlo simulations, chaos theory and neural networks have all attempted to get closer to modeling real financial markets. Of course a model will never be the real thing, and those who put too much faith in their financial model will get caught out, as the boffins at Long-Term Capital Management (a hedge fund which collapsed in 1998) spectacularly illustrated. Ultimately, even financial firms have learned that mathematics has limited value in calculating the probability of the most bizarre and extreme events.

As regulators and forward-thinking firms have got to grips with this problem, they have ventured into the more uncertain territory of designing stress-tests, imagining scenarios and occasionally playing out entire fictions of the future. This is what makes the discipline of risk management more than just a computer-driven exercise practiced by nerds in back offices. It challenges the wildest imagination and the frontiers of creative genius.

Like mountain climbing, it is about minimizing danger and taking calculated risks. Alpinists learn that principle fast or they and their friends die. Dealing with risk in financial markets is different; the stakes are not usually so high. And in financial markets most risktakers are risking other people's money, not their own. That makes financial markets a highly complex arena - far more complex, for instance, than a theatre of war. Every trading decision may have a plethora of motives and emotions behind it; in theory each trade adds new information, but mostly it adds noise.

In the 21st century, the noise from newswires, websites, radio, television and newspapers has become so deafening that sometimes the entire world population seems to be a single thundering herd. All humankind is focused on the troops in Afghanistan, an earthquake in Iran, the fortunes of the Dax or the Dow, or the earnings of IBM, which are "disappointing" because they did not quite surpass those in the previous quarter. Like Pavlov's dogs, we are being conditioned to salivate or recoil as massed ranks of financial news sources pump out their messages.

Good financial risktakers have to make sense of all this garbage. And they have to combat their own emotions, because dealing in financial markets, even on others' behalf, is an emotional business. Even if they are not your own dreams, you are seeing people's dreams made or unmade every day. Money, or wealth, especially these days, is the chief means through which people hope to enhance their lives. So the financial markets, apart from being a vital clearing mechanism for world commerce, are places of dreams and emotions. Someone who takes that on board will never make the mistake of believing that market behaviour can be mimicked by maths.

Despite that caveat, a whole industry has grown up in the last 30 years based on the idea that the behaviour of financial markets can be interpreted and outsmarted by mathematical models. The modelmakers sell the illusion that patterns and prices will repeat themselves. Sometimes the illusion is self-fulfilling.

The endless fascination of markets is that they are always changing, as if consciously seeking to spite human efforts to tame them. Just as fascinating is the behaviour of the institutions that make up the markets: banks, investments banks, insurance companies, corporate treasuries, brokers, exchanges, clearing houses, central banks, pension funds, hedge funds, day-traders and speculators. Like strings of mountain climbers they are keen to safeguard their own survival. But to stay in the game they have to take risks.

Calculated financial risktaking, and the way in which institutions align themselves to do it, is the most compelling game of all.

More fascinating than risk-management successes, which are generally non-events, are the spectacular failures. Failures tell us about the extremes of financial stress. There are plenty of lessons to be learned from the collapses of Barings, Metallgesellschaft, Long-Term Capital Management and other lesser blips, many of which are analysed in this book.

Such analysis should help prevent financial institutions from making the same mistake twice. Bus this has not always been the case, as some rather accident-prone institutions have shown.

This book considers the notion that dealing with financial risk, however serious and grown-up it seems, is nevertheless a game. It has basic rules and set pieces, and performance that can be improved by practice. Yet most risk managers and the institutions they work for - and indeed those who regulate them -- do not give themselves the chance to test their skills in practice; they are generally at the coal-face doing it for real 24 hours a day.

Learning from past mistakes is useful. Learning from mistakes that could happen tomorrow is a crucial risk-management exercise. Yet the little scenario-building and stress-testing that financial institutions have done so far is mostly too abstract. They do not expose their staff in training to the kinds of stresses that occur in live financial crises. But they could, and should, do so at little extra cost, by playing full-blooded financial war games, internally and even with rival institutions.

You can buy David Shirreff's super book, Dealing with Financial Risk at the Economist's Bookstore.

Can you believe what some moron called his kid?

In case you missed yesterday's wonderful Photoshop:

The biggest bargain in New York is a $20 alta kaka (senior) season pass to New York's public tennis courts. It lets you play for free. Only one problem: When we went up there yesterday, we couldn't get a court. This confirms Murhpy's Second Law: Just when you want to buy a second one of your favorite thing, the manufacturer has stopped making it.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.