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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (8759)	12/22/2006 2:20:58 PM
From: ahhaha	Respond to of 24758

Taleb sold his hedge fund before he could really prove that it was successful. Ah, there's the rub, For in that sleep of death what dreams may come When we have shuffled off this mortal coil, Must give us pause: also, his strategy is implicitly dependent on volatility not contracting further, but in fact it continued an inexorable decline for years after his book was published. Taleb should have read me. Volatility never changes. It's constant. One merely has to make appropriate corrections to normalize or regularize the price function to see this. The big question I admit is whether the price function is renormalizable. i think most traders would have gone bankrupt implementing his strategy--it wasn't the best timing for the volatility-must-rise argument (today may be better timing). All timing is randomly distributed. This is intimately related with whether the price function is renormalizable. in short, it seems the most remunerative thing Taleb did was not to implement his strategy, but to brand it with the catchy "black swan" moniker, and to market it in the form of a meandering and pompous book. Quite correct. He got out before he was regularized. i think Taleb made some good points, but his interpretation was rather too stiff and dogmatic for my taste. he may have been more nuanced in his private thoughts as he apparently put his money in T-bills instead of rolling the dice on his fund. The expected return in Tbills is almost exactly equal to the return on perfect spreads, in case anyone wanted to know how your post was germane to the conversation. No one believes this academic assertion except those who have been around long enough to know that the price function is renormalizable.

To: Wyätt Gwyön who wrote (8759)	12/24/2006 1:35:45 PM
From: GraceZ	Read Replies (1) \| Respond to of 24758

I'm better at assimilating concepts than remembering where I got them so thanks for reminding me of Taleb and making that attribution for me. As for representing his strategy as: also, his strategy is implicitly dependent on volatility not contracting further, This is a deceptive interpretation. His strategy is dependant on things remaining pretty much the same as they have over the history of the market. As traders get more confident, returns more consistent, they tend to, in his words, "denigrate history" in that they forget (or simply fail to protect themselves against) the risk that comes from the unpredictable events which show up periodically that cause large price dislocations, events like 9/11 or the Russian debt default. Neiderhoffer, in the article you linked to, is a perfect example in that he not only denigrated history but his own experience in blowing up twice in exactly the same way. but in fact it continued an inexorable decline for years after his book was published. Entirely understandable considering the size of the price dislocation after the I-net bubble burst and 9/11. As the market rises out of these holes, the asymmetry of positions (ie. the long bias of market participants) makes professionals hedge their profitable long positions with puts, put option premiums expand. They are simply buying protection from the downside, not necessarily looking down. This increase in put buying gets buried by the increase in those buying calls to make a leveraged bet on continued advances. As you can see in this chart, since mid 2001 the VIX has mirrored price advance. mywebpages.comcast.net All this tells you little or nothing about whether or not Taleb's strategy of buying cheap out of the money options was a good one. His strategy is independent of timing and market forecasting because the events he depends on cannot be predicted, this is what makes them Black Swans. I did get a big chuckle out of your pointing out that: i think most traders would have gone bankrupt implementing his strategy I laughed simply because it so closely follows his story about how George Will discounted Shiller in his interview pre I-net bust by pointing out that since Shiller announced that stocks were wildly over valued they had doubled as if that in itself were proof that Shiller was incorrect in his assessment. In other words, you are denigrating Taleb's strategy based on one observable outcome rather than the unobservable list of outcomes on which his strategy is based. You've judged his strategy based on a single outcome rather than the validity of the "generator". In his book, he uses the example of someone who wins 10 million playing Russian roulette as an example of this, if the guy wins he is a genius, if he loses, a dead fool when in fact the cost of losing is too high a price regardless of outcome. This gets us back to the original subject of this conversation thread, Smarts wanted to know what risk he was over looking in his "perfect" hedge. The objections people expressed had everything to do with the unobservable outcomes he wasn't considering. The concern wasn't necessarily that they had a high probability of occurring, but, with the very small probability of them occurring, was the calculated return sufficient to make the risk acceptable. It is easy to see that a one in six chance of blowing your brains out isn't enough for most people to play Russian Roulette even for a 10 million dollar return, that Russian Roulette is a "flawed income generator". What we strived here to determine is when it comes to the small, but real, probability of having both sides of a perfect hedge turn out to be losing: is that risk offset with a return which, over time, approaches the risk free money rate? If one is going to get Tbill rates why not buy Tbills? Perfect hedges, over time, will always approach the risk free rate of return. Smart's biggest "risk" was that his strategy would work! Basically having it work would encourage him to continue along that line in which case his returns, over time, would undoubtedly align to this inescapable probability. As for Talib quitting and selling his hedge fund, all I can say is that intellect doesn't protect you from the ravages your own psychology suffers from holding losing positions day in and day out. Talib saw as one of his risks that he would succeed, in that if he was highly successful and many people were convinced to follow his strategy by seeing his success the lopsidedness of positioning would shift to make his strategy a failure! I don't know why he sold the fund, what most likely happened is he simply failed to attract additional capital, as capital tends to flow to those who have generated the best historical gains (ones most likely to fail in the future as their performance reverts to the historical mean)....which means his strategy has a much higher payoff now than it ever did. As the article points out, people like to win early and often, they can live with the small risk of losing it all and they prefer that to the opposite stance of losing repeatedly with the small chance of gaining big. That's why we have so many regular Joe's who go to a job every day for a regular pay check and so few inventors and entrepreneurs, two professions where repeated failure is the most likely outcome but from which success can lead to fabulous advances. Now Talib, having ended the torment of continual losses can live with the other torment of wondering if, on having abandoned a strategy, he left it just before it actually paid off. Good thing he has those book sales to fall back on.