Sometimes when I hear things that market participants say, I almost begin to sympathize with Nassim Nicholas Taleb's shoulder-chipped rant "Fooled by Randomness", in regards to lurid stereotyping he offers of the average market trader. This gem was picked up from Naked Shorts, references the testimony of an energy trader testifying before Senate committee investigating Amaranth, and is well-deserving of the "Moronic Statement of the Week Award":
One trader said, “Seven-standard deviation events happen all the time in this market.” [Emphasis added].
I doubt whether anyone of the august Senators took him to task on this one.
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4 comments:
An ironic reference to Mr. Taleb, given that the infrequency of multi-standard deviation events proved to be the undoing of Empirica.
I do think FBR highlighted some good points, particularly markets' frequent overestimation of the signal-to-noise ratio and their own forecasting prowess.
Nevertheless, I would concur with your implicit suggestion that FBR's caricatures are just that- caricatures.
The Naked Shorts piece was referring to the recent testimony of a trader at US Congressional Amaranth hearings.
Was Empirica a victim of randomness (an unpredictably prolonged period where vol moved more or less in one direction and where the tail was more or less nascent) or the result of neglect and bad forecasting due to an underestimation of the persistence of negative real interest rates, and prior path of elevated historical volatility that made a lower regime and nascent tail simply more probable?
My dislike of FBR was less in its technical message (kind of obvious to quantitiative and behavioural finance aficionados), but rather the "tone" of the book where he seems to have some under-stated and represesed resentment about being contrarian, about being thoughtful in a business where thoughtfulness doesn't guarantee, nor is even a pre-requisite for success. Not being, a shrink, it came across as if he secretly wished he was the 190cm bond-haired quarter-back, who pulled the chicks and was lucky, (with a bit a smarts). He wasn't comfortable in his skin. Listening to his interview yesterday on BBC with Owen Bennett-Jones, he has become much more confident and comfortable now, than then.
Taleb merely suffers from insufferable and terminal Mediterraneanism. I've been forced to conclude that there's something in the diet of people that are born within spitting distance of the centre of the world that makes many of them believe they can walk on water. Could that something possibly be...?
On a more logical note, to assume that the improbable happens with enough regularity to make money on it (that being the wrench in the works) is, well, incoherent - but nonetheless appealling.
As a practial matter, I welcome a good luck anytime. Hence, the decision has been made rather than agonize over what to do next. May be luck, but one still has to be at the same Bat-time and the same Bat-channel (for those of you who remember old Batman shows)! So the old addage "luck favors the prepared" also applies.
-pi
ps Mr Cassandra, will you do the honors of updating BoJ Threat Scale. :}
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