So, I made either a huge mistake or a hugely great decision to read Black Swan today...still only about 140 pages in, but already am starting to see where he's going with this.
The premise for his argument is that you can't see the black swan events...and therefore cannot possibly be expected either to avoid them, profit from them, or claim any fault (or credit) for what happens in your portfolio ever. He seems to extend the idea out to every happening ever in history...essentially, everything that happens ever is luck. Starts to make you wonder how exactly he defines luck. You can't just say the whole of the universe is luck...clearly some events are dependent on other events. I can't quite tell if he's for or against EMH as we know it...he doesn't seem to be convinced that any amount of information will change anything...so he almost dismisses any discussion about price efficiency out of hand as there can be no efficiency. They just are what they are at any given point.
Basically, I just want to open this up for discussion. What are your opinions on EMH, randomness in price movement, luck, using past behavior to predict future behavior, stock picking vs. quant. analysis vs. tech. analysis, and generally being able to model data to a fair degree of certainty? For a guy who started as a quant, he sure seems to take a giant, hot steamy shit all over what he and others did and have done for years with quite a bit of success.
My $Z2c...
Before NNT became a philosopher-at-large and a media whore, he occasionally had somewhat interesting and meaningful things to say. But that was a long time ago, in a galaxy far far away...
One thing for sure, NNT ain't a fan of EMH. Wasn't one of his more outlandish publicity stunts all about suing the Riksbank for giving a Nobel Prize to Sharpe etc?
I think he made good money doing what he did. I believe that whatever you do, you need to be in the right place at the right time. That's the secret for success. Once you have substantial capital and contacts (built up on your book) in the industry, you can work in such a way that the odds are 80-90% in your favor. It's not so much about statistics.
Most rich people I know go into business knowing that the odds are in their favor (or they manage to create such situations).
My opinion.
i've read his book, i can't believe how he drags out simple concepts forever.
imo, fundamentally this stuff goes back to the philosophical problem of induction. yes, just becuz we've never spontaneously seen a pebble transform into a hippo doesn't mean that that could not happen. but we live our lives assuming that pebbles wont spontaneously turn into hippos and proceed...
taleb's rage against quant models is pretty retarded. obviously models make assumptions, and sometimes they are wrong. does that mean we should stop using models for rocketships and airplanes?
ofc taleb would say no, he'd just say that "social sciences aren't like the natural sciences and humans are harder to predict."
duh, did he have to write a book for that?
does that mean we should stop trying to develop quantitative methods for humans? no. last time I checked, humans are made out of atoms just like rocks are, and humans behavior is governed by natural laws too, but in a more complex way.
as for the "luck" argument, it is not about mathematics, it's all about the story people tell and the stories you choose to believe. does anyone think that usain bolt winning the olympics was mostly luck? no. what about fund managers? harder to say. what about poker? for phil ivey, I doubt it. for http://en.wikipedia.org/wiki/Darvin_Moon? probably.
You guys are overthinking it.
Basically the concept is no one ever sees the black swan events. Generally that's true. Even people that predicted the Great Recession also predicted similar crap for years or decades. His point is that why give credit for that call? What you can get credit for is if you understand the risk is always there. So, do what you do best and always hedge the tail ends. Most people won't because they feel they "know" times are "good", "safe", etc. But if tomorrow WW3 broke out, the markets would tank and those who bought downside puts would feel MUCH better. All they can take credit for is getting "in case sht happens" insurance. No model would predict a random 9/11 event, but the chance is always there and you might as well protect or hedge it.
OP, stop dramatizing this book as if it changed your life. If it did, you need to think outside the box more.
OP, finish the book first, because the point definitely isn't that you can't do anything about randomness.
Taleb is a bit of a douche, and his books have been getting worse, but Fooled by Randomness is a worthwhile read imo. Also, nobody who really wants to make some money in the markets truly believes in EMH.
The worst mistake I ever made as a budding trader was reading anything this guy said. Much like Peter Schiff, broken clocks are right twice a day, and these two smashed it out of the park from 2008-09. His wealth comes mostly from the books, and I'm pretty sure his track record as a trader (during tail events!) is nothing to write home about, unless of course you are writing about how poor it was. If you want to read a book by a guy who threw up ideas into a bunch of pages, I recommend Alchemy of Finance by George Soros because at least that guy could beat the spx way back when
The thing about market efficiency is you either need to have a strong enough belief to use it as a core assumption of your quantitative models or you consider it a useless mind-fucking trap from time to time. Even a highly controlled market is sometimes very efficient (such as ZCE in China) and even some of the most liquid markets (such as spot EUR/USD) can be inefficient at times.
I personally think the debate over EMH is a waste of time. It depends on the time horizon of your trades, your risk appetite, the markets you have positions in, etc. There are just so many factors that have price impacts and they're constantly changing. There are also some really big players who work together to hold a certain market at a certain level for a period of time before they push it through up or down.
I also wonder that Taleb as a trader must have done very poorly in terms of PnL. He's not an idiot, and he definitely knows what he's talking about. The problem is, perhaps it's just me, that the way he explained the importance of "luck" sounds so cynical. I don't know why and I don't need to know why. It all comes down to subjective comprehension.
I bought the black swan but never read it. I gave it away to an intern in my office a while ago. His other book "fooled by randomness" was one of my favorite books when I just started out in this business. What market has taught me was that luck is of course extremely important but at the end of the day if you want to succeed in trading, you can't be too much ahead of the curve. That was probably his major problem I figured. You need to be in at the right time in right size with the right mentality, regardless of your approach, to be able to profit.
Lots of good points. Kind of held off reading more yesterday and of course today, but might read more tonight.
I never believed in EMH, because it just is a crock of shit. If it was true, then the only explanation anyone would have for making money would be luck. But this isn't true at all. Opening this discussion up somewhat taps into some very heavy time-space physics topics that I try to avoid when dealing with this question but somehow seem inseparable. It comes down to whether or not you really can model behavior, I think. Whether you're doing on the fly by the seat of your pants like Soros or you're filtering out price data to the Nth degree for a million different variables and scenarios like Simons, you are at some point admitting that you think there is some kind of rational reason behind price movements. You also have to admit that they move in a way that can be described, in a rational way at that. Things don't just happen randomly. If Alcoa's main mill blew up tomorrow, you cannot tell me that there is a statistically significant chance that their share price wouldn't change. But if you're a hardcore EMHer (is that even a thing? Do people like that even exist?), you almost have to believe this is the case...because you cannot make money from knowledge discrepancies. But we all know that's not true. It just can't be. For example, in my paper account over the summer, when Zynga announced a mass layoff late in the market hours, I saw it come up right away on Bloomberg and shorted them instantly. Made a nice little chunk of change. Easy. I'm sure a lot of people did. But EMH says that could never happen.
I also never liked the idea of Brownian motion, as there is no way at all you can simply call the movements of a price completely random. If that were the case, a company could report record earnings, record profits, record sales, and still have a 50/50 chance of their share price taking a dump...and all associated derivatives would be affected of course. Has this happened? Sure. Does it happen often enough that you can call price movement random? I just do not believe this is the case. Not even a bit. It cannot be.
I think his definition of "luck" seems to be the thing that really gets me. He seems to be of the mind (and this is where the astrophysics comes in) that everything that ever happened was going to happen, and it only just matters where you are in the history of time, nothing else matters. You cannot reliably put yourself in a better place than anyone else, except of course by expecting the unexpected...sure.
I agree with lots of the smaller points he makes...but I still cannot agree so far with his larger premise, at least I think. I have more to read, so there's a lot more to be revealed. This discussion can get very intense and complex very quickly, so its hard to know when to stop.
I have been doing some reading regarding thermodynamics and entropy, and furthermore on "thermoeconomics" which specifically applies the second law of thermodynamics to markets. If you think about it, it makes a lot of sense. I have a feeling that quantum physics and physics in general has a lot more overlap with the "social" sciences than most people would have previously thought.
But what if those record earnings weren't as much as the market was anticipating nonetheless? You're missing the point of the whole argument in my opinion. I don't think anybody is arguing the markets are perfectly efficient at every given point in time, just that chances are (and this is true) you aren't going to be one of the successful ones. It's also saying if Alcoa's mill blows up tomorrow, you short it like you describe doing to Zynga, you being able to cover at a profit is pretty rare. For example, over what time frames are we talking? Cause yeah, you can scalp sometimes and sometimes that works. But the strategy you just described is pretty generally known to not outperform over time, so you can't really use anecdotal evidence when there were billions of other transactions that didn't occur like that on that day alone.
Furthermore, there's points to be made against even the "then why are all the successful ones from the value camp" (or any single strategy camp) argument that always comes up. Those people chose a strategy that has worked during one of the biggest economic booms in human history, for example.
There are people that do a bit of both, and believe there are only a few different factors for which taking more risk can also yield more return over time, while thinking markets are like 98% efficient, like Dimensional (look at their AUM growth).
Physics is a sexy field to tie to finance/economics/markets right now, but ultimately the frameworks from a huge number of fields could be applied to markets with enough creativity and understanding of how those systems work. Hence why RenTech has hired biologists, etc.
I know you don't believe (and refuse to believe) that some explanations can be true in certain situations like you described, but you also are ignoring a lot of market-specific factors. What if that was the popular exit point for many extremely leveraged hedge funds, and they all decide to sell en masse? What if a huge event happened in another market that caused huge outflows from equities? (I know, alpha/beta/etc, but you see my point.)
I guess what I'm getting at is that you have some good points, although to me they don't seem fully thought through. Furthermore, you probably refuse to believe his idea of what basically amounts to the ideas of Determinism because it probably strongly goes against many of your most firmly held personal beliefs.
You raise some great points. I'm kind of framing my posts more as just thinking out loud. I have lots of theories and ideas floating around in my head, along with many things that I'm reading/have read. I have to admit that I am not 100% committed to any one set of beliefs, other than that in a non-infinite time scale, the market is certainly not anywhere near perfect efficiency.
I mean, in my Alcoa example, I would imagine that you would short the instant you could....although if you didn't hear the news soon enough you might not of course. But, if you are watching the news, you'll likely see something like that almost as it happens. I would imagine you'd be able to cover the short profitably, as the share price (I would think) would drop and stay low for a while at least. It might be a bad example because it plays right into the ideas I'm trying to prove, I guess. The Zynga example is a better example of something that maybe wasn't as wide spread. But again, if you were watching anything like Bloomberg, CNBC, or just on your broker's client interface, you'd have seen it scroll across. And it took several minutes for the price to even drop, there was a decent amount of time to make a move. I mean, I don't necessarily only use that strategy in my paper account. I have some long term shorts based on a couple ideas, and a couple long-term long positions based on a few other ideas. I try to keep things diversified as far as ideas go. Because, as you say, you can't maybe just pick one idea and go with it, long term that won't work of course.
Believe me, I spend maybe much more time than I should thinking about these things. But, there is always more to know and always something you don't know. Determinism is something I struggle with of course. On one hand, my religious beliefs say that things will work out for the greater good no matter what. Now, this might actually fit in with the idea that all of time and history is set...and in fact if you were to look at space-time as a fixed continuum, it could be said that all time is happening at once. In fact, this is a widely held view in physics. This means that all things are fixed in time, that whatever is going to happen happens. So, are your actions really your own? Do you really make choices? Or do you have only the illusion of choice? If you decided to buy 100 shares of APPL back in the day just on a whim, when it was worth only a couple bucks, did you really have the option not to buy the shares? Like I said, this opens up a whole can of worms relative to all kinds of very heavy topics. One part of me wants to isolate the idea of price movement and focus on just that, but on the other hand, you can't do that. After all, market prices are just a function of human behavior to some extent. Even black box activity was designed by humans at some point.
I think the ultimate question is whether or not things are going to happen the way they happen regardless of our input, if you could call it input. Strangely enough, I think my religious beliefs would fit nicely with the idea that all time happens at once, therefore all events happen at once, and therefore of course must be pre-determined because of course you should be able to observe any event given the right trajectory. But then of course you feel quite powerless thinking that you have no control over your own life...and I cannot believe that. Statistics does seem to somewhat prop that up however. It's kind of a strange and scary thought. I think once quantum computing becomes viable, we will see lots of interesting developments in math, physics, stats, and we will see an increasing connection between everything that happens in the universe.
OP -- I don't think you understand the EMH
"If Alcoa's main mill blew up tomorrow, you cannot tell me that there is a statistically significant chance that their share price wouldn't change."
^^The above you wrote has nothing to do with EMH. All it supposes is that the information that a plant was going to blow up was unknowable beforehand, not that prices don't react to news. If you want to critique the hypothesis, you need to understand it better. You can't just say it's crazy to think it. There are many people who have done a lot of research who have concluded that EMH is true and they're not all crazy. Many reasonable people disagree with EMH as well.
Also, it's very sexy to compare the markets to physics, but it's better in theory than in practice. In physics, when you conduct an experiment, everyone doing it gets the same result. (When I drop a ball, it always falls to the ground) In the markets or in any social science, the best you can hope for is some degree of predictability, not absolute certainty. (the market equivalent is, when I drop a ball it is more likely than not to fall to the ground)
My statement was an extreme over-simplification - I understand the EMH just fine but I guess I'm not doing a good job of explaining my thought process here. More or less what I am saying is that the price of a security at any given point in time cannot possibly take into account all information that can be known about said security at the instant in time where you measured the price. Perhaps in the long run you might be able to say that things catch up - but in the short run there are exploitable differences that can most definitely be picked out as they develop and taken advantage of. The extent of my argument isn't that "it's crazy" of course. My apologies if I seem dismissive of it without actually understanding it.
I do understand what you're saying - I guess I could add that just because quite a few very prominent people believe in it, does not mean I will or even that it is right. There are plenty of things that were taken for granted in the world right up until the moment they were proven to be absurd. Not wanting to disparage anyone who does take EMH to be the absolute truth...but I tend not to believe it. That's all. However, this is why I read as much as I have time for. The more knowledge to draw on when making an opinion, the better.
@"Tupac" you're maybe right...I will give that a read as soon as I can. I guess in the long run, the market as a whole might be said to be "random"...and I'm going to quote someone I generally disagree with...but we don't live in the long run, we're all dead. The "longest" run we invest for might only be for a decade. No HFs, market-making firms, or anyone else really is going to realistically hold onto an investment vehicle nearly that long. Many things tend to take a general shape over a very long course of time, and that is undeniable. But what look like blips in the screen on, say (in the future) a 500 year stock chart are very real and very exploitable differences in the short run. This is all obvious, I suppose. But there are many that believe even in very short terms (months, weeks, days) price action is completely random and does not follow any pattern. I don't know about patterns per se, but I cannot believe it is random. There are always things happening that push the price one way or another, whether rightly or wrongly.
But I'm really glad to see the discussion on here, because I didn't' start this thread to preach my own beliefs, only to compare them to what others believe and have a discussion on why we all think the way we do on this topic. Thanks to everyone who has replied so far.
I have to agree with Dick Fuld, I do not know if you have fully grasped EMH ^^
"A company could report record earnings, record profits, record sales, and still have a 50/50 chance of their share price taking a dump": what EMH says is that you cannot anticipate these record earning, profits, whatever, and therefore that you cannot anticipate price movements; Brownian motion allows us to model this phenomenon as according to EMH, roughly, at any time there is an UNconditional probability of 1/2 going up and 1/2 of going down.
On the other hand, you said that EMH could be true on the long run but false on the short run. Well, most evidence and testing relating to EMH seems to point to the contrary! Which to me seems logic: if some company announces unanticipated earnings, it is easier for investors to evaluate how these extra earnings are affecting the value of the company and therefore the stock price should tend to adjust quickly to its objective price; however, when speaking long term you have to evaluate the company with regards to some more abstract concepts, such as growth prospects, future profitability of products being developed, etc. so it should be more common to wrongly price the security.
Concerning the Zynga example, I agree with Tupac. Maybe that time you were able to profit from the news, but maybe the next time you won't be that quick and you will lose money, and on the long term you will get a return near to 0%. I do not think that EMH holds in any market at any time, but I think it is a pretty accurate description of markets, especially for segments such as blue chips, currencies, etc. After all, for me it seems pretty common sense, if investors have valuable information about a company they're gonna try to profit from it, bringing the stock price to some sort of objective price; sometimes they will gain, but others they will lose because they were slower, and on the long run they won't make money from that strategy (if not, we will all be rich!).
As for Nicolas, I've read FBR, BS and Antifragility, and clearly FBR is his best one, I recommend to read it. He gives more interesting insights for a trader that the other 2 and is quite more interesting. I agree with some of the comments here that NNT says a fair amount of bullshit, but what I like about his vision is that he encourages you to be constantly on you guard and prepared and keep in mind that, although everything might seem just right today, you may be lacking important information and everything could just blow up tomorrow. I think this is a pretty useful mentality is you wanna succeed in trading and investing.
Cheers
Markets are generally efficient but micro-inefficiencies will always exist as long as traders learn information at different rates. However, competition and costs drive the returns of these inefficiencies down over time. An example would be arbing SPY and ES. These opportunities still happen, but there are more firms competing for the same pie and the costs of being fastest in a winner-take-most/all game rise until there is near-zero profit for firms as a whole.
The same thing happens if you have a good predictive signal. If you're the only one that knows it, you can generate excess returns for quite a while, but as others learn it independently or through poaching talent, the returns get competed away over time. Firms then need to spend more money on research to get back in the game.
You can almost think of there being a market for alpha itself. At certain times you can generate it for less than your returns, but over time this market equilibrates and the cost of generating the alpha tends toward its value. Someone is always outperforming at any point in time but doing it persistently is quite difficult due to competition, simultaneous discovery and secrets leaking. It's like any other competitive business; staying on top generating economic profits is not easy. The best businesses usually have some inherent quality like scale, consumer preference, network effect, collusion or regulatory capture that keeps competitors at bay. Financial businesses based on relationships like top VCs getting first look at deal flow or a market-maker who has guaranteed right to retail orders can generate persistent returns in this way.
There are also liquidity and capacity issues with exploiting inefficiencies. Small shops with low AUM can exploit them, but it becomes increasingly difficult to generate alpha as your portfolio grows since you'll influence the market. A lot of large hedge funds have trouble because of this unless they're trading on inside information.
In general the more active a market, the more difficult it will be to generate returns. In less liquid markets like microcap stocks, startup funding, real estate, etc. there are more opportunities to trade for value if you have superior analysis or information.
Ummm markets are not efficient by EMH standards and I'm actually surprised that EMH supporters believe they are? One of the premises to be efficient is that there should be no taxes. Not only there are, but also different players pay different rates. From the HF through the Caymans or Ireland, to the day trader, to the 401kers, Another is insider trading, it's happening but it's illegal, hence anyone who;s going to be doing any of that will try to avoid impacting the price of stock X when selling or buying in order to avoid any suspicion from the SEC and get to enjoy the full up/down potential when the info becomes public. That leads to the other issue of information asymmetry. A professional will have better access to more concrete and timely information and resources to evaluate new information on the way. That's not the case for a great many other investors. Not saying a retail, passionate, investor cannot deliver superior results than AMs or HFs but he has an uphill battle to fight. Liquidity varies too. Try trading mid-small-pink stocks. Fear/Greed. Humans are a complex species and they appear to adopt irrational behaviour a great many times. Why did DJIA (along with many other international indices) made a new record in september/october 2007 to 14k+ points when at that time it was clear we were heading towards a bumpy road? Competing interests. You and an activist investor may be long in the same company, it doesn't mean you're getting into any elevator. Neither will a CEO always try to maximise shareholder value. Think about a newly appointed CEO at a well managed company in 2008/9/10; why not take advantage of the "crisis" and make some Financial Statement cleaning, under the perception that the next 2-3 fiscal years will allow him make record profits, record this and record that. Similarly, pros where loading up on MBSs without being confident it was the right choice (or knowing full well it wasn't the right choice), their prospectus for which they worked for dictated otherwise, though. Even a hedgie had big issues with his LPs when he started shorting that market and he was right. It's a Game of Thrones out there.
Here are some thoughts on EMH from people who are worth listening to: http://www.institutionalinvestor.com/Article/3315202/Asset-Management-E…
It's a long 'un. You have been warned.
Thanks for the link, it was a very clear explanation of EMH that mirrored a lot of my own thoughts.
Nassim Taleb Warns to Stay Out of Investment Industry (Originally Posted: 08/15/2012)
http://www.businessinsider.com/nassim-taleb-investment-industry-2012-8?…
Guy definitely speaks with authority, and has equations and everything. And his multi-colored beard is adorable.
Haven't read the article yet, first thing I noticed is it kind of looks like he is giving the shocker in his picture
I do not like him. Reading his self inflating books is such a chore.
saw him speak once...audience seemed pretty close to collectively boo'ing
I don't think this is more true now than in times past. There has always been an element of the 'lucky coin flipper' in the investment business. Clearly, not everyone who has had good performance has done so because of skill. That's true today and was true 20 or 50 years ago as well.
Met him a bunch of times. Dude is crazy arrogant. Also, he poses no real solution to the black swan problem other than wayyyyy out of the money options ad infinitum.
http://wheninfinance.tumblr.com/post/28843594078/how-nassim-taleb-actua…
He cited himself in his own paper what an asshat. Also at what point is performance like Peter Lynch's not luck?
that happens often in academia/patents
He's obviously obsessed with himself but I still find him brilliant. Books are a little slow, but fooled by randomness made me think differently about life.
I didn't even read it or click the link, but random chance has played a significant part in the career of nearly everyone who has ever "made it" as a businessman or entrepreneur. Nothing wrong with that in my opinion.
"I find that the harder I work, the luckier I get." - Thomas Jefferson
He's trying to keep out the competition, clearly.
:P
Nassim Taleb & Black Swan (Originally Posted: 11/29/2013)
Curious to hear your guys' thoughts on this guy's views and on this book. I'm 3/4 into it. At first, I thought he was pretentious and full of shit. I still think he's pretentious, but I'm starting to side with him on a lot of his views.
There's definitely merit to his theory...the problem lies in the fact that there is no real practical way to deal with it completely. Hedging out tail risk is expensive and can't always be accomplished.
It is one of the best books that I have ever read.
"If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience." George Bernard Shaw
Recommend you read his "Fooled by Randomness" as well. Incredibly intelligent man.
I've listened to interviews with him and he might be the most arrogant SOB on earth…that said its one of the best books I've ever read.
I think the pretentiousness of the book comes from his being jaded with the current risk management system and trying to bring about a change. The core argument that we as a society underestimate the frequency of outlier events is very thought-provoking. My problem with the book comes with some of the extrapolations Taleb comes up with that really don't make much sense outside of his framework (i.e. the job choice stuff).
Nassim Taleb is a Ron Paul fan (Originally Posted: 01/22/2012)
Just thought this was kind of cool:
Prof. Taleb, I'd be really curious to hear what you think of the current political campaigns, specifically that of Dr. Ron Paul. It seems that you have a lot of fans among his supporters - myself included
Nassim Taleb - The only person I trust is Ron Paul.
That sounds like an endorsement!! Do you mind if we publicize?
Nassim Taleb - Yes, go ahead. What I write is what I think . "The Only Candidate I Trust is Ron Paul"
https://www.facebook.com/permalink.php?story_fbid=10150522482998375&id=…
That's pretty subjective as an endorsement. The only candidate I trust is Ron Paul too. That doesn't make him any less batshit crazy. The devil you know I guess.
Nice username.
Nassim Taleb plays the Don't Pass line
Taleb writes and talks about imposing regulations on the financial sector that are draconian by today's standards. Paul would not be pleased.
What regulations?
He mostly advises against the bell-curve derived models... you know the ones that destroy Wall Street firms exposed to tail-risks that are improperly hedge. Unsure if criticizing VAR and CAPM for Basile III is considered regulation. He was against the bail-outs.
Anyway great choice with Ron Paul.
I was curious when I first read Black Swan so I found him on fundrace/similar page to try to find out what sort of politician he supports, and I think all I remember seeing was his name next to democratic candidate(s).
Taleb's 5th Rule (Originally Posted: 01/16/2013)
"The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you are the only one to put on."
Is there a theoretical or behavioral basis for this, and if so, can someone explain it. If there is any distinctive trait required for this rule to apply to a market, a discussion of that would be appreciated as well (liquidity, dealer, etc.)
I'm not a trader or risk manager, professional or otherwise.
One example that sort of falls under this:
Lets say a client comes in and sells a shitload of calls, and he just does a driveby and hits every bank there is in monster size. This is a directional client and just wanted to collect some premium. Now every bank is long these calls and they dynamically hedge their position. So as the stock rises, they get long delta on the calls and so sell stock. And whenever the stock falls the hedgers buy stock. So the hedgers are basically all acting in this scenario against their interest, they all want the stock to mvoe to capture profits through gamma, but lets say the stock moves down 2%, its a vicious circle of you think everyone wants to hedge to lock that move in, so you hedge as well, because you think tis gonna happen with you or not. Now if all individuals think like that they all buy and push the price back. Therefore guess where the stock moves towards? yep the strike of that option, and all the hedgers are stuck with pin risk.
Interesting, especially the pin risk, which comes from the asymmetric nature of the options contract and uncertainty on whether to hedge. But what you are saying would apply in any markets where market makers like to keep position sizes constant and harvest profits, right?
A similar story could occur in vanilla corporates right (where I guess the hedge is some combination of rates futures and CDS)? As in, fund sells exposure. Desk hedges exposure. Bond moves up, hedging futures move down. People buy more hedges, if enough people do that bond moves back down?
there's not much behavioral or empirical basis for a lot of things taleb says, such as being long otm options being a profitable strategy
I just gave quite a clear behavioural example of one of the things he says.
ACCORDING TO NASEEM TALEB, YOU ARE ALL PLAYERS OF RANDOMNESS. (Originally Posted: 01/11/2012)
ACCORDING TO NASEEM TALEB, YOU ARE ALL PLAYERS OF RANDOMNESS.
DISCUSS.
Your caps lock key is broken.
Nice spelling their bud...
And who are you talking to?
random thread for starters.
It's true.
People in finance, economics, etc. underestimate the role of randomness probably because they don't want to admit that success/failure is largely dependent on good/bad luck and not on skill.
Predicting asset prices, calculating cash flows for NPV, forecasting sales/earnings, etc. are all impossible... at least statistically to predict them you have no better shot then what you would expect from chance alone.
People actually believe this? I thought it was widely accepted that even with a high number of participants in the market inefficiencies still frequently occur and often persist for unusually long periods of time. I mean I have no doubt people greatly underestimate how often they're right cause of luck, but so many traders and hedge funds have seen consistent success well above what one would expect if merely chance that was involved.
i definitely am a playa bro
There is a good video made a while back on youtube talking about this and the history of LTCM...statistically study of trading as anyone in trading knows is bs...obviously luck plays a role, but "statistically speaking" a trader who is profitable for 30 years should be impossible, yet it happens.
I didnt read the book the OP is referring to, but I assume thats the major premise of it.
On the buy-side such a player takes tail-risks and hasn't been met by the reaper.... or he is extremely lucky. Out of thousands of participants you would expect a few to defy the odds.
Too much criticism about Taleb. The guy has been a trader since the 1980s and he took advantage of people who made high-probability trades during low volatility. He started writing his books well before the crisis. He's also not anti-finance... he actually advises how to make finance more robust. What's so wrong about being suspicious of economic models? He is a supporter of free markets and was against the bail-outs.
His ideas are also easy to understand. The black swan is a simple concept. His criticism of the bell-curve model of risk because it doesn't apply to financial price behavior.... this was also confirmed by Benoit Mandlebrot. Everyone underestimates the role of randomness in business and in life. There's no certainty.
taleb is a pussy
/thread
^^^the subprime mortgage crisis, for example..case and point
We just had an efficient markets discussion a few days ago - A Random Walk Down Wall Street. That being said, the subprime mortgage crisis is not an unquestionable inefficiency - the argument could certainly be made that markets acted efficiently there. As to the inefficiencies that "still frequently occur and often persist for long periods of time," many of these are explained by different risks they are exposed to. For example, the risk of something that has never happened before that could wipe out the position. Without going deep into the trade, you would never observe it, but the risk is there, and real, and appears like an inefficiency.
And Taleb may have possibly gone crazy before writing his populist books, which from an academic point of view are next to worthless. But how else can you sell so many books? If he actually went into detail on his theories, (1) 99% of his readers wouldn't understand him, and (2) he would contradict his other statements. Long story short, very biased and populist books released at just the time when everyone hated finance and wanted to "expand" their hatred. So good business idea for Taleb, but the books are worthless. And I say that as someone who thinks markets are pretty efficient.
he has one good point and expands it into 2 books. this is what we call attention span arbitrage, ladies.
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