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After reading Taleb's books and thinking about his strategy, it's akin to buying lottery tickets. Lots of little losses with a large win on infrequent random e
by kruhft 14y ago
After reading Taleb's books and thinking about his strategy, it's akin to buying lottery tickets. Lots of little losses with a large win on infrequent random events.
It sounds more regal when you say "structure the trades to reduce your exposure to downside risk while increasing your exposure to upside from unanticipated random events" though.
- shogunmike 14y agoThis also has a similar profile to the classic momentum - "trend following" - strategies. Higher quantity of loss-making trades (albeit small losses), but the winners win big.
- tokenadult 14y agoTaleb responds to the analogy with lottery tickets by pointing out that lottery tickets have a strictly bounded upside (and a strict bound on the expectation of winning).
- kruhft 14y agoTrue, risk adjustments can be made to modify those bounds in real markets, unlike with actual lottery tickets where you have no control over the upside and expectation of winning. But the idea is still very similar in it's basic strategy. Given Taleb's understanding and belief in randomness of the market, I see him as "creating his own lotteries" using rather sophisticated techniques that have paid off very well. The cost of entry is small and the potential rewards are high but he loses regularly and consistently and says he was grateful to be in a position where he could execute such a strategy without being looked down upon by his superiors (from Fooled By Randomness).
- jmount 14y ago"Buying lottery tickets" is a good analysis. The issue is that normal technical trading (the kind Taleb criticizes) is "selling insurance" in disguise (years of small profits and then a huge "unexpected" blow-up).
- Patient0 14y agoAnother good phrase: "picking up pennies in front of a steamroller" - which is when you do the opposite strategy (lots of little gains, but with the risk of losing it all and more).
- sseveran 14y agoThis specifically refers to a call of strategies that are the equivalent of writing a put option. The short term cash flows from the premium are not commensurate with the tail risk. Both LTCM and CDS on subprime are examples of this type of strategy going up. Typically the options have a duration of years which raises the probability of a tail event significantly.
- Roboprog 14y agoI love this term. One of my friends at work manages trading systems (for use by actual financial experts) and we were discussing this discredited strategy recently. It's killed one or two big companies, despite being a Nobel prize winning idea.
- ttrreeww 14y agoYou are not getting it :) The beauty is you keep the profit while the lost is socialized either via bailout or bankruptcy. That is why Wall Street is #1. Then you start another Wall Street firm. Ben will chip in the funding for basically free if you are well connected. (This is also why Wall Street pays out all profit to real people, instead of keeping it within the firm.)
- monksy 14y agoI believe that this was coined in the book "Dark Pools."
- SkyMarshal 14y ago>it's akin to buying lottery tickets. More precisely, it's akin to buying mispriced lottery tickets with a high positive expected payoff that hasn't been priced in yet.
- endofeuro 14y agoI agree that "it's akin to buying lottery tickets".It is more of a protection than a strategy.