Billion Dollar Trading Losses: Is Biology to Blame?

[masterm1ne]

Quote from logic_man:

There's actually some evidence that Buffett uses a variant of the Kelly Criterion for his position-sizing (see the wikipedia article on Kelly for a citation), so, given his track record, I'm sure that he puts much more than a small percentage of his capital at-risk.

Point being, you don't know what's "disproportional" unless you have detailed data on historical performance. For all you know, the guy's track record justified an even bigger bet. Ironically, while attempting to claim the trader profiled in the article was ignorant, you have shown just how ignorant you are of position-sizing methods.

You talk about learning as if the ability to learn isn't biological. As is the ability to ignore lessons that others, with different biology, could learn more easily. Or that different hormonal states lead one to take more or less risk. We've only begun to scratch the surface on the causation, but as tools for monitoring traders' brains and chemistry, I have no doubt that those will become part of the risk management schemes on trading desks.

So, yes, everything in trading is biological.

It's actually more of a blend.

Perhaps you need to read some more on Kelly:

Reasons to bet less than Kelly - A natural assumption is that 
taking more risk increases the probability of both very good and 
very bad outcomes. One of the most important ideas in Kelly is 
that betting more than the Kelly amount decreases the 
probability of very good results, while still increasing the 
probability of very bad results. Since in reality we seldom know  
the precise probabilities and payoffs, and since overbetting is  
worse than underbetting, it makes sense to err on the side of 
caution and bet less than the Kelly amount.

Buffett can do whatever he wants. He has had recent losses that are gigantic realtive to his net worth. He's clearly comfortable with that, and that's explained in the Kelly criterion.

Disproportional betting size is irrelevant to track record because past results don't guarantee future performance. Bet size should be determined by the money you can afford to lose. In Buffetts case, he feels he can afford to lose it. Again, I ask, can the average Joe on WS afford to risk $1B? My guess is no. Comparing this guy to Buffett is nonsensical. The man is well diversified in many things and knows that his future income is stable because of that. How many traders have business plans like his?

I will admit ignorance on betting methods, because there is little reason to know more than the most important thing, which is not to risk very much of your money on any one bet.

No one is going to argue that biology plays no role, but it's not just biology like this man is saying.

 

[MarketMasher]

And instead of having Risk Managers, they should have posters of people who look like Risk Managers on the wall, because it is a lot cheaper and they are just as effective.

Still need the senior management there though, because somebody's got to be there to blame the trader and say "I didn't know what was going on - I'm just senior management!!"

 

[logic_man]

Quote from masterm1ne:



Again, I ask, can the average Joe on WS afford to risk $1B? My guess is no. Comparing this guy to Buffett is nonsensical.

I will admit ignorance on betting methods, because there is little reason to know more than the most important thing, which is not to risk very much of your money on any one bet.

No one is going to argue the two aren't linked, but it's not just biology like this man is saying.

Who is average Joe on WS?

There are two separate categories of traders who lose $1B: those who do it on the sly without their firms knowing and those who are authorized to lose that much precisely because their firms trust them.

"Average Joe on WS" has absolutely zero to do with either case.

I'd still love to know what this mysterious "something besides biology" is. Is it bigger than a breadbox? Are you saying that these guys are possessed by supernatural demons? What else is there in this world than biology? Does the name Charles Darwin ring a bell with you?

 

[HopelessTrader]

Quote from logic_man:

What else is there in this world than biology?

Nature vs. Nurture

It's a pretty dumb argument if you ask me.

How nature and nurture work together is more interesting.

 

[oldtime]

Quote from logic_man:

Who is average Joe on WS?

There are two separate categories of traders who lose $1B: those who do it on the sly without their firms knowing and those who are authorized to lose that much precisely because their firms trust them.

"Average Joe on WS" has absolutely zero to do with either case.

I'd still love to know what this mysterious "something besides biology" is. Is it bigger than a breadbox? Are you saying that these guys are possessed by supernatural demons? What else is there in this world than biology? Does the name Charles Darwin ring a bell with you?

well yes there actually is according to quantum physics. Two particles can communicate with no biological connection.

 

[logic_man]

Quote from HopelessTrader:

Nature vs. Nurture

It's a pretty dumb argument if you ask me.

How nature and nurture work together is more interesting.

"Nurture" is "applied Nature".

 

[logic_man]

Quote from oldtime:

well yes there actually is according to quantum physics. Two particles can communicate with no biological connection.

Until quantum computers take over as the next generation of HFT or humans morph into quantum cyborgs, I am not sure this is relevant. Obviously, the carbon and other elements in the human body are subject to the laws of chemistry and physics as well.

The point is that the topic "Is biology to blame?" is actually almost a rhetorical question since there is no other possible motive or driver for human action other than biology, unless you drill down to the level of the laws of physics. At that point, though, the ability to analyze causality becomes very weak. At least at the biological level, you can draw correlations between something like hormone levels and trading performance, but I don't think you could apply the laws of physics and draw similar correlations.

 

[oldtime]

Quote from logic_man:

Until quantum computers take over as the next generation of HFT or humans morph into quantum cyborgs, I am not sure this is relevant. Obviously, the carbon and other elements in the human body are subject to the laws of chemistry and physics as well.

The point is that the topic "Is biology to blame?" is actually almost a rhetorical question since there is no other possible motive or driver for human action other than biology, unless you drill down to the level of the laws of physics. At that point, though, the ability to analyze causality becomes very weak. At least at the biological level, you can draw correlations between something like hormone levels and trading performance, but I don't think you could apply the laws of physics and draw similar correlations.

well, I disagree. Biology may be all we sort of understand now, but quantum physics are already starting to fill in a few gaps, especially when it comes to things like "hunches". So a hunch could be governed by different laws than say a "gut feeling" which is clearly governed by biology.

Where the two meet is yet to be seen, at least according to what I have read.

 

[HopelessTrader]

Quote from logic_man:

"Nurture" is "applied Nature".

Isn't "Biology" a paradigm?

 

[logic_man]

Quote from HopelessTrader:

Isn't "Biology" a paradigm?

Can you define how you are using "paradigm"? I am talking about flesh and blood human existence, the genetic inheritance you get from your parents, etc.

"Paradigm" says to me that you are thinking about some kind of philosophy of science or something. Some of that is interesting, but, frankly, of little use to anyone who isn't getting paid to produce it or the grad students who will get paid to produce the next generation of it.