Protean flexibility is unquestionably an asset. I think a lot of good traders who are also money managers understand that their clients often need certainty and rationality, or the soothing appearance of such, when simple return drivers such as cutting off tail risk sound too basic or unsophisticated for the large sums involved. So they sling a line of bullshit.
Trading Wisdom for Aspiring Hedge Fund Managers
- Thread starter darkhorse
- Start date
- Status
Protean flexibility is unquestionably an asset. I think a lot of good traders who are also money managers understand that their clients often need certainty and rationality, or the soothing appearance of such, when simple return drivers such as cutting off tail risk sound too basic or unsophisticated for the large sums involved. So they sling a line of bullshit.
Maybe 90% is an exaggeration but I would say it's the most important factor. If your risk control is excellent, you can overcome many other mistakes, because they will never hurt you much. You will survive quite a long time even if your edge is mediocre - maybe long enough to learn more strategies and improve your edge enough to start grinding out a decent profit. Good risk control also avoids the psychological pressures that come when you are down big on a position, or are in the midst of a large drawdown - you avoid the 'death spiral' where one initial mistake compounds into other mistakes made under pressure. Lastly, you will survive black swans like 9/11, and have most of your powder dry when other people are panicking or forced to liquidate to stem the red ink.
I would say there is one other important aspect of risk control, that is overlooked. To control risk you must prepare and plan rigorously, and consider all scenarios - doing so makes you more prepared and able to capitalise on big profit opportunities, just as much as it protects you from big losses. So, proper risk control means you will improve your profits on your winners as well as reduce losses on your losers, and you will turn some losers into winning trades, by adjusting in accordance with your contingency planning.
About money managers - if you are down by X, then it means you either intended to risk X, or you did not plan sufficiently for that possibility. Also, if you are down X, that means your real risk was always more than X (it is statistically virtually impossible that you experienced the worst possible outcome). So, if a fund manager is down 30%, for example, it means their real risk they were running was at least 40%, maybe 50%. The inescapable conclusion is that they either intentionally risked 50% (which, given the risk attitudes of their investors, would have been deceptive and irresponsible at best, fraudulent at worst), or they had no clue how much risk they were taking. Either conclusion is damning in the extreme, and seriously calls into question their professional competence.
For example, on january 1st 2007, I wonder how many hedge fund managers analysed their strategy and trading book, and said "What will happen to our performance if the S&P has a 60% peak to trough bear market?". My guess is, not many did. And the ones that did do that analysis, should not have lost any more than they had told their investors they were willing to risk.
One good measure of risk control is to ask how much you will lose if you have a strong conviction that turns out to be utterly wrong, and your positions all turn out to be more correlated than you expected. Another rule of thumb is that your worst drawdown will be about twice as big as you plan for. So, if you think you are risking 15% worst case drawdown, your worst DD is more likely to be up to 30%.
"The mind can be a wonderful tool for self-delusion âit was not
designed to deal with complexity and nonlinear uncertainties.
Counter to the common discourse, more information means more
delusions: our detection of false patterns is growing faster and faster
as a side effect of modernity and the information age: there is this
mismatch between the messy randomness of the information-rich
current world with complex interactions and our intuitions of events,
derived in a simpler ancestral habitat âour mental architecture is at
an increased mismatch with the world in which we live."
taleb....
alot of information is just poisonous..
designed to deal with complexity and nonlinear uncertainties.
Counter to the common discourse, more information means more
delusions: our detection of false patterns is growing faster and faster
as a side effect of modernity and the information age: there is this
mismatch between the messy randomness of the information-rich
current world with complex interactions and our intuitions of events,
derived in a simpler ancestral habitat âour mental architecture is at
an increased mismatch with the world in which we live."
taleb....
alot of information is just poisonous..
Well - that's the purpose of thinking, to work out what is the rational way to approach reality. Emotions are unreliable for interpreting reality, and so we should use empirical observation (making it as unbiased and accurate as possible) and logical deduction, which have a much better track record. Use emotions for things like improving and sustaining motivation and hard-work, team-building, networking, learning etc - not for designing one's trading approach or making trading decisions.
I agree that if there's a standard, you can judge things against that standard - Minaj may be a better dancefloor filler than Mozart at a given nightclub, for example. But this seems to contradict perspectivism - there's a standard, and A is objectively better than B at getting results according to that standard. So, we have an objective fact that can be tested, measured, and thus proven. Yet perspectivism (as far as I understand it) rejects the notion of objective facts. I would support a limited kind of perspectivism, where it is admitted that objective facts are often hard to demonstrate in many situations, and the frequent bias of people is accepted and guarded against.
Aside from this rejection of any objective standard, is there any difference between this 'perspectivism', and old-fashioned philosophical pragmatism? I.e. what matters is what results your epistemology gets (or is likely to get). I agree that epistemology is just a tool to be able to interpret and handle reality as well as possible. But, this tells me to be a pragmatist, and to try to construct the most robust and useful epistemology that I can - not to claim that no facts or objective standards exist.
About the dream of the ant, I would ask - in what way would my sense-data experiences be any different, if I were experiencing objective reality, or if I were the dream of an ant? If they were to be identical in both cases, in what meaningful sense are those two things different? The very concept of an illusion or dream *requires* some eventual denouement to reveal it as false i.e. it must be contradicted by the eventual intrusion of reality. If that does not occur, then I don't think it can be called an illusion or dream in any meaningful sense of the word.
Anyway, it's an interesting discussion, might be better on a philosophy board! Every trader, whether they know it or not, is trying to form an accurate epistemology about market data and future prices. In a way, it's a miniature version of what philosophers and scientific thinkers are trying to do with the whole cosmos.
Aside from this rejection of any objective standard, is there any difference between this 'perspectivism', and old-fashioned philosophical pragmatism? I.e. what matters is what results your epistemology gets (or is likely to get). I agree that epistemology is just a tool to be able to interpret and handle reality as well as possible. But, this tells me to be a pragmatist, and to try to construct the most robust and useful epistemology that I can - not to claim that no facts or objective standards exist.
About the dream of the ant, I would ask - in what way would my sense-data experiences be any different, if I were experiencing objective reality, or if I were the dream of an ant? If they were to be identical in both cases, in what meaningful sense are those two things different? The very concept of an illusion or dream *requires* some eventual denouement to reveal it as false i.e. it must be contradicted by the eventual intrusion of reality. If that does not occur, then I don't think it can be called an illusion or dream in any meaningful sense of the word.
Anyway, it's an interesting discussion, might be better on a philosophy board! Every trader, whether they know it or not, is trying to form an accurate epistemology about market data and future prices. In a way, it's a miniature version of what philosophers and scientific thinkers are trying to do with the whole cosmos.
I like this Taleb quote, and I think he is more or less correct in speaking of the untrained mind. But he overlooks the brain's incredible powers of plasticity. Information does not have to be poisonous, nor does the flow have to be overwhelming; a large part of the point is that you can train yourself, and adopt your habits and automatic thinking patterns, to survive and thrive in the modern day environment. We are born with Savannah 1.0 wiring, but we have the ability to reconfigure the system manually and install Modernity 2.0 wiring. The mind is marvelously adaptable.
I don't think this one is worth very much. There are sellside analysts and brokers on Wall Street who make millions of dollars a year spewing out advice they never take themselves; in similar fashion there are coaches and book writers who do very well for themselves (financially) giving advice to others. These individuals will produce ten or a hundred times the volume of the average blatherer who is not professionally employed in the advice-dispensing business. What's more, one cannot even say all the analysts and coaches are full of hot air - it may be true for most, but some may be very good at what they do.
The true version of this saying might be "the average joe who talks a lot is probably full of shit, and most advice is not worth listening to, although some is," but that just doesn't sound as witty or zingy so the less accurate version appeals more.
Though perspectivism may rule out objective facts on a technical level, on a practical level it can and does embrace them as fully as any other belief system.
Take the thought experiment of Kant's malignant demon, to wit, the possibility that all the sensory input you receive is actually a deception wrought by a mischievous being. If all your senses were reporting harmoniously false information, how would you know? The answer is, you couldn't know... all of our contact with reality is filtered through the lens of sensory experience, thus we are forced to trust such experience no matter what.
In respect to objective facts, the perspectivist is like someone who says "well, given the possibility of Kant's malignant demon in some form, the input given by my senses may be false." But acknowledging this on a technical level does not prevent the perspectivist from pragmatically using (and functionally trusting) his senses on a day in and day out basis, as there is really no other option and the persistent illusion of valid sensory feedback - if that is what it is - is a quite reliable and good one.
For instance: Every morning I assume that my office chair will hold me, and not collapse when I sit on it abruptly. I may turn out to be wrong one day, and get unceremoniously dumped on the floor - the possibility at least exists. If someone asked me whether I had absolute faith in my office chair, or in the inviolable structural nature of chairs in general, I would laugh and say of course not. But still, trusting my chair each morning is quite a reasonable bet.
Once again you can take this idea and extend it out in all sorts of directions. I believe one could easily be a perspectivist and a good scientist, for example, because perspectivism does not rule out the acceptance of standards, theories (in the scientific explanatory sense of the word) and laws; it simply recognizes that, ultimately, underpinning all this, viewpoint and historical context are undeniable factors in everything we believe and think is 'true'. Being aware of this deep nuance is potentially useful at the margins in all sorts of subtle attitude-impacting ways.
In another way this is comparable to the rational and logical individual recognizing that he was born with an irrational and illogical mind, and that to a certain degree those traits can be reduced but never wiped out completely - it is more an honest acknowledgement of the true limitations of the state of things, than a denial of the notion that rationality and logic are valid and have good uses.
The smart perspectivist will strive to be as objective as possible within the scope of a given standard set, and recognize the value of useful objectivity levels in others, while yet remaining cognizant that, at the end of the day, all is context and construct.
Well, there may be a number of important differences where the devil is in the details, but it is hard to say because old-fashioned philosophical pragmatism sounds pretty general.
I would agree with the general spirit of the notion that various forms of empiricism and laid back acceptance of what 'is', coupled with pragmatic use of the results obtained from experiments, have been around for a very long time, dating to the ancient Greeks.
It is likely that, from the time mankind learned to speak and communicate, there have always been communities of true believers and skeptics at odds with each other. In some ways perspectivism simply carries on and fleshes out much older traditions.
I quite like this excerpt from Sarah Bakewell's excellent book on Montaigne, for example, which briefly describes the allure of Pyrhonian skepticism:
Pyrrhonians accordingly deal with all the problems life can throw at them by means of a single word which acts as shorthand for this maneuver: in Greek, epokhe. It means "I suspend judgment." Or, in a different rendition given in French by Montaigne himself, je soutiens: "I hold back." This phrase conquers all enemies; it undoes them, so that they disintegrate into atoms before your eyes.
This sounds about as uplifiting as the Stoic or Epicurean notion of "indifference." But, like the other Hellenistic ideas, it works, and that is all that matters. Epokhe functions almost like one of those puzzling koans in Zen Buddhism: brief, enigmatic notions or unanswerable questions such as "What is the sound of one hand clapping?" At first, these utterances cause nothing but perplexity. Later, they open a path to all-encompassing wisdom. This family resemblance between Pyrrhonism and Zen may be no accident: Pyrrho traveled to Persia and India with Alexander the Great, and dabbled in Eastern philosophy - not Zen Buddhism, which did not yet exist (!), but some of its precursors.
This is the point where the monk would laugh, smile good-naturedly, and hand you a small flower.
Yeah, I really enjoy this stuff, though it's easy to understand why many don't... one might further analogize critical thinking skills to knowing how to swim, in which case this is the deep end of the pool, or perhaps being out in the ocean (whereas a lot of traders still need floaties).
- Status