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There is a good section about currency bands in Nassim Taleb's first book, Dynamic Hedging. It's a fairly technical book about risk management for options trade

by minimax 12y ago

There is a good section about currency bands in Nassim Taleb's first book, Dynamic Hedging. It's a fairly technical book about risk management for options traders, but the section on Market Barriers is particularly germane. I think it's valuable in the sense that it gives you a window into the way a skilled risk manager views the world versus the naïveté of retail traders. This was only a "black swan" event if you had no idea what you were doing. https://books.google.com/books?id=-5-OldaTjVQC&lpg=PA227&ots=L_7HVjyaVk&dq=options%20wizard%3A%20and%20ems%20war%20story&pg=PA224#v=onepage&q&f=false https://books.google.com/books?id=-5-OldaTjVQC&lpg=PA227&ots...

onewaystreet 12y ago
His advice is all well and good but "skilled risk managers" can be just as dumb as everyone else. This has been proved multiple times in just the last few decades alone.
- 300bps 12y ago
  His advice is all well and good but "skilled risk managers" can be just as dumb as everyone else. I work at an investment bank and I can safely confirm that most professional investment managers and risk managers fall for this type of stuff all the time. If you want an example, look as Nassim Taleb's idiotic moves. Here's just one from 2010: http://www.moneynews.com/StreetTalk/Nassim-Taleb-Shorting-Treasuries/2010/02/04/id/348993/ http://www.moneynews.com/StreetTalk/Nassim-Taleb-Shorting-Tr... So in 2010 Taleb's advice to short U.S. Treasurys. How'd he do in the last 5 years? If he followed his own advice then he lost almost half his money on that trade as US Treasury rates fell dramatically since then. I'm not picking on Nassim Taleb. He's a smart dude. But everybody - everybody - makes dumb investment decisions.
  - conistonwater 12y ago
    > I'm not picking on Nassim Taleb. He's a smart dude. No, but you should pick on him, in a public-figure kind of way, I mean, not personally. He very publicly said (I paraphrase) "all macroeconomics is nonsense, you should short treasuries". His advice ran against solid macroeconomics and was demonstrably wrong. It wasn't just "dumb" advice, it was advice that deliberately ignored all sense and deliberately plumped for a dubious economic theory. If I said something really stupid, I would expect to be called out on it. In general, I think, people would be better off if bullshit got called out.
    - Tycho 12y ago
      Just because it didn't come to pass, doesn't mean the risk wasn't real.
      - conistonwater 12y ago
        By that logic you can never prove any prediction wrong. I think you're setting the bar too low.
        Tycho 12y ago
        “You have a very small probability of making money,” he said. “But if you’re right, you’ll never see a public plane again.” -Taleb, on shorting treasuries
        conistonwater 12y ago
        Maybe not important, but in the video minimax linked to in another comment, he said that about buying far out of money options on precious metals to bet on hyperinflation happening, not shorting treasuries to bet on rising rates.
  - minimax 12y ago
    Shorting treasuries in 2010 was a popular sentiment. I'm sure you could have found a similar suggestion in the WSJ at the time. It is extremely unlikely, given Taleb's background as an options market maker, that he would have expressed that trade simply as an unhedged position in cash treasuries or the futures while he sat bleeding money for five years straight. It's an important distinction to make and I think it comes back to my original point about risk management. It is one thing to make a prediction and it's a separate step to then formulate a trade that captures upside if your prediction is correct and limits your downside if your prediction is incorrect. From a trader like Taleb, I think that's implicit in his statement, but maybe it wouldn't be so obvious to a layperson.
    - conistonwater 12y ago
      Taleb was very precise in what he said, and he didn't say anything like what you are attributing to him. There wasn't any real nuance, he really just said it was a good idea to short treasuries: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azLmks3BmQm4 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azLmk... http://noahpinionblog.blogspot.ca/2014/01/of-brains-and-balls-nassim-talebs-macro.html http://noahpinionblog.blogspot.ca/2014/01/of-brains-and-ball...
      - minimax 12y ago
        Taleb has written literally hundreds of pages on risk management and if you don't consider any of that as context, I guess you could assume he literally meant to get short some delta one treasury product. I think that's a little bit naive but whatever. You can watch the full video here: http://2010.therussiaforum.com/news/session-video3/ http://2010.therussiaforum.com/news/session-video3/ You have to switch it from Russian (ру́с) to English. He says you want an "active position" where you "benefit from rise [in rates]." The video then shows Hugh Hendry, who has basically the opposite position but for European government bonds. He is short rates (so long bonds) but he has an options position which fixes his maximum loss at some known value. Hendry spells it out, but I think given Taleb's background, he probably meant something like that (but in reverse).
  - mlchild 12y ago
    Not to kneejerk defend Taleb, but I believe his stated position is that he loses money on his trades almost all the time, and then makes it all back and more when a black swan event occurs. I don't believe a black swan has occurred in the treasury market in the last 5 years, so it would be interesting to hear if he's still waiting for one there.
    - aswanson 12y ago
      That sounds insane. How can you wait for a black swan to clean up all your losses? That's a strategy? By definition, a black swan is unpredictable.
      - PhantomGremlin 12y ago
        There is an extensive Wikipedia article[1] on this topic. Here's an excerpt: In economics and finance, a Taleb distribution is a returns profile that appears at times deceptively low-risk with steady returns, but experiences periodically catastrophic drawdowns. The general idea is that because black swans occur infrequently, their risk is significantly under priced by most people. NB: Taleb does not advocate investing using a Taleb distribution; instead he warns against that sort of investing. [1] https://en.wikipedia.org/wiki/Taleb_distribution https://en.wikipedia.org/wiki/Taleb_distribution
      - JacobAldridge 12y ago
        By definition, a specific Black Swan is unpredictable, but in general the likelihood of any Black Swan event is higher than the markets factor in. You'll never pick the day it happens. But if you invest everyday, eventually you'll be right (according to the theory). Take a trade that will almost certainly lose you 1% per annum BUT, in a Black Swan event will return you 1000%. Every year you 'bleed', and it takes guts to keep investing. Then one day something hits the fan, and you were the only one exposed to the upside.
        aswanson 12y ago
        Sounds like a naive implementation of venture capital investing. But I like VC's upside better.
  - this_user 12y ago
    One difference between professional traders and amateurs is that pros don't judge a trade by its outcome but by the idea and its execution. What makes something a good trade is if it is a good idea at the time based on the available information. But even the best idea may not work out and that's where risk management comes into play. Conversely, you can also make money on a bad trade, but it's still a bad trade. A professional trader's job is not to predict the future but to make good trades. Taleb's idea may have been good at the time that simply did not work out. Of course, his statement tells you nothing about the concrete implementation of this idea which more often than not will make all the difference w.r.t. a trade's outcome. Maybe he even did actually make money from the idea. There's really nothing to suggest that he would have shorted in 2010 and just held the position since then.
deleted 12y ago
[deleted]

by minimax 12y ago

onewaystreet 12y ago

His advice is all well and good but "skilled risk managers" can be just as dumb as everyone else. This has been proved multiple times in just the last few decades alone.

300bps 12y ago
His advice is all well and good but "skilled risk managers" can be just as dumb as everyone else. I work at an investment bank and I can safely confirm that most professional investment managers and risk managers fall for this type of stuff all the time. If you want an example, look as Nassim Taleb's idiotic moves. Here's just one from 2010: http://www.moneynews.com/StreetTalk/Nassim-Taleb-Shorting-Treasuries/2010/02/04/id/348993/ http://www.moneynews.com/StreetTalk/Nassim-Taleb-Shorting-Tr... So in 2010 Taleb's advice to short U.S. Treasurys. How'd he do in the last 5 years? If he followed his own advice then he lost almost half his money on that trade as US Treasury rates fell dramatically since then. I'm not picking on Nassim Taleb. He's a smart dude. But everybody - everybody - makes dumb investment decisions.
- conistonwater 12y ago
  > I'm not picking on Nassim Taleb. He's a smart dude. No, but you should pick on him, in a public-figure kind of way, I mean, not personally. He very publicly said (I paraphrase) "all macroeconomics is nonsense, you should short treasuries". His advice ran against solid macroeconomics and was demonstrably wrong. It wasn't just "dumb" advice, it was advice that deliberately ignored all sense and deliberately plumped for a dubious economic theory. If I said something really stupid, I would expect to be called out on it. In general, I think, people would be better off if bullshit got called out.
  - Tycho 12y ago
    Just because it didn't come to pass, doesn't mean the risk wasn't real.
    - conistonwater 12y ago
      By that logic you can never prove any prediction wrong. I think you're setting the bar too low.
      - Tycho 12y ago
        “You have a very small probability of making money,” he said. “But if you’re right, you’ll never see a public plane again.” -Taleb, on shorting treasuries
        conistonwater 12y ago
        Maybe not important, but in the video minimax linked to in another comment, he said that about buying far out of money options on precious metals to bet on hyperinflation happening, not shorting treasuries to bet on rising rates.
- minimax 12y ago
  Shorting treasuries in 2010 was a popular sentiment. I'm sure you could have found a similar suggestion in the WSJ at the time. It is extremely unlikely, given Taleb's background as an options market maker, that he would have expressed that trade simply as an unhedged position in cash treasuries or the futures while he sat bleeding money for five years straight. It's an important distinction to make and I think it comes back to my original point about risk management. It is one thing to make a prediction and it's a separate step to then formulate a trade that captures upside if your prediction is correct and limits your downside if your prediction is incorrect. From a trader like Taleb, I think that's implicit in his statement, but maybe it wouldn't be so obvious to a layperson.
  - conistonwater 12y ago
    Taleb was very precise in what he said, and he didn't say anything like what you are attributing to him. There wasn't any real nuance, he really just said it was a good idea to short treasuries: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azLmks3BmQm4 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azLmk... http://noahpinionblog.blogspot.ca/2014/01/of-brains-and-balls-nassim-talebs-macro.html http://noahpinionblog.blogspot.ca/2014/01/of-brains-and-ball...
    - minimax 12y ago
      Taleb has written literally hundreds of pages on risk management and if you don't consider any of that as context, I guess you could assume he literally meant to get short some delta one treasury product. I think that's a little bit naive but whatever. You can watch the full video here: http://2010.therussiaforum.com/news/session-video3/ http://2010.therussiaforum.com/news/session-video3/ You have to switch it from Russian (ру́с) to English. He says you want an "active position" where you "benefit from rise [in rates]." The video then shows Hugh Hendry, who has basically the opposite position but for European government bonds. He is short rates (so long bonds) but he has an options position which fixes his maximum loss at some known value. Hendry spells it out, but I think given Taleb's background, he probably meant something like that (but in reverse).
- mlchild 12y ago
  Not to kneejerk defend Taleb, but I believe his stated position is that he loses money on his trades almost all the time, and then makes it all back and more when a black swan event occurs. I don't believe a black swan has occurred in the treasury market in the last 5 years, so it would be interesting to hear if he's still waiting for one there.
  - aswanson 12y ago
    That sounds insane. How can you wait for a black swan to clean up all your losses? That's a strategy? By definition, a black swan is unpredictable.
    - PhantomGremlin 12y ago
      There is an extensive Wikipedia article[1] on this topic. Here's an excerpt: In economics and finance, a Taleb distribution is a returns profile that appears at times deceptively low-risk with steady returns, but experiences periodically catastrophic drawdowns. The general idea is that because black swans occur infrequently, their risk is significantly under priced by most people. NB: Taleb does not advocate investing using a Taleb distribution; instead he warns against that sort of investing. [1] https://en.wikipedia.org/wiki/Taleb_distribution https://en.wikipedia.org/wiki/Taleb_distribution
    - JacobAldridge 12y ago
      By definition, a specific Black Swan is unpredictable, but in general the likelihood of any Black Swan event is higher than the markets factor in. You'll never pick the day it happens. But if you invest everyday, eventually you'll be right (according to the theory). Take a trade that will almost certainly lose you 1% per annum BUT, in a Black Swan event will return you 1000%. Every year you 'bleed', and it takes guts to keep investing. Then one day something hits the fan, and you were the only one exposed to the upside.
      - aswanson 12y ago
        Sounds like a naive implementation of venture capital investing. But I like VC's upside better.
- this_user 12y ago
  One difference between professional traders and amateurs is that pros don't judge a trade by its outcome but by the idea and its execution. What makes something a good trade is if it is a good idea at the time based on the available information. But even the best idea may not work out and that's where risk management comes into play. Conversely, you can also make money on a bad trade, but it's still a bad trade. A professional trader's job is not to predict the future but to make good trades. Taleb's idea may have been good at the time that simply did not work out. Of course, his statement tells you nothing about the concrete implementation of this idea which more often than not will make all the difference w.r.t. a trade's outcome. Maybe he even did actually make money from the idea. There's really nothing to suggest that he would have shorted in 2010 and just held the position since then.

deleted 12y ago

[deleted]