Quote from marketsurfer:
i enjoyed the book very much. he is a talented, brilliant mind. the reason i brought the book up, is due to your examples of succesful trend funds. on page 128, taleb talks about starting with 10, 000 fictional managers, (performing a negative expectation montecarlo simulation where the loser of each draw of a ball leave the game, there are more details---ou can read it yourself) making the managers incompetent, 198 of these managers rise to the top , less than 2%--- yet they have great track records. do you see where i am going with this?
by the way, taleb has much respect for niederhoffer. rumour has it, the perceived past rift has ended. 
best,
surfer
(I request a pardon in advance for the frustration-born sarcasm that follows. Ye have been warned.)
Dammit Surf⦠are you really this mathematically impaired, or are you just playing the patsy to keep me on your thread?
I directly answered your question in the last post. It was obvious what you were referring to when you brought up Talebâs book in the first place. That is why I explained, or so I thought, that survivorship bias frequently applies to long-only managers and one-way hedge fund managers, and that luck can last for quarters to years in a secular bull market. But survivorship bias does NOT last for two decades. Nor did Taleb ever SUGGEST it did. He would not suggest such a ludicrous thing because, dare I say it, Taleb is
probably handy with a calculator.
You mentioned the 10,000 manager starting point. In the hopes of closing this case, we will proceed with a seventh grade statistics lesson. Very elementary. Very simple to understand. I hope.
First, letâs imagine that a lucky fool manager has a 50% chance of surviving in any given year â that is to say, he has coinflip odds of sustaining a track record, not blowing up, and otherwise staying in business. (Note that this is a VERY charitable assumption for multidirectional markets. When trading futures, the odds of getting lucky sans edge for 12 long months are far below coin-flip.)
NOW. The question is, how big a starting base would it require for just ONE of these lucky fools to survive for twenty yearlong trials â- or actually just nineteen -- given that half the starting base folds each year until there is one manager standing.
This is easy to calculate. All we have to do is start with the number one â as in one lucky fool left standing â and double it as many times as it takes to get back to the original starting point. This works because the original starting base is decreased by half each year. 50% odds of attrition per year for all the lucky fools. GET IT? It is so very simple, please Lord say he gets it.
So, letâs see. In year twenty, there is only one lucky fool who got all the coinflips. That means in year nineteen, there were two lucky fools. In year eighteen, there were four. Year seventeen, there were eight. Year sixteen, there were sixteen. (Interesting.) Year fifteen, there were 32. And so on. You can take it from here.
Where do we wind up? Is a starting base of 10,000 managers sufficient to have a lucky fool â a lucky fool running hundreds of millions mind you â still in biz after
two decades?
Ready for the frying pan to the face? Here it comes.
Based on the ridiculously charitable odds of 50% survival per year, to have just ONE LUCKY FOOL after all that time, you would need a starting base of not TEN THOUSAND managers, but FIVE HUNDRED AND TWENTY FOUR THOUSAND, TWO HUNDRED AND EIGHTY EIGHT.
Donât believe me? Itâs easy to check the math. Start with 524,288. Cut it in half nineteen times. You get down to one. Very simple.
But wait! There is more than just one multi-decade trend follower with big bucks under management! In fact there are more like ten -- and even that is probably a lowball estimate. Care to do the math on
ten lucky fools over twenty years? I'll save you the trouble: for the coinflip bit to apply, the starting base would have to be 5 million plus.
Were there fiiiiive milllllllyun trend followers toiling away in 1985, surf, all sticking it out in their doomed randomness? Were there even 50,000 back then? 5,000? 500???????
I hereby declare your statistics license officially revoked.
p.s. I donât know whether Taleb made nice with Niederhoffer, but I doubt it changes his professional opinion of the guy. Even blowhards can make good neighbors. If NT professes 'much respect' for VN, it's likely in the same way that Ali G has 'much respect' for the queen of england.
p.p.s. No more soup for you! I am DONE with this cockamamie thread.
Cheers.
