Feb

12

 Specs. I am trying to write a little something about technical analysis. Here's what I came up with. (by the way the first one to show that random charts and stock market charts look similar was Harry Roberts I think in 1956 or so but Holbrook working may have done it 20 years before). Anyway, how would you improve on what I wrote.

Most traders in the markets use charts and technical analysis to establish and exit their positions. Academicians and skeptics point to the random nature of many technical patterns. Here's a typical chart generated by random numbers. If you don't tell a trader it's randomly generated, they'll come up with all sorts of predictions and patterns that the chart generates. And if you dare to suggest that what they're doing is mumbo jumbo, they take great offense and beat you on the head with examples of great traders who follow charts, and examples of others who consistently make a fortune by using charts.

There's a trader from Harvard who uses charts and has made 20 billion who says "using a chart is like a Dr. taking your temperature before a diagnosis." Another one says that if charts are so useless how come everyone including you looks at it before making a trade. One of the most respected and successful traders, a friend, puts the debate in focus: "There are lots of great tools in technical analysis (some of them in his book like trader's positions, and breakouts, open interest and spreads). They're very useful as part of a bigger trading process. There are good saws and hammers but it takes a good carpenter to make them work."

There's a guy in Japan who calls himself the Japanese Victor Niederhoffer who has turned $ 10,000 into 5 million by using charts. I hope to meet him in Japan when I visit there for a talk arranged by one who believes in charts, an estimable fellow who combines charts with anthropology, life extension and sports, and perhaps I will become the American Matsohita-Masamichi.

Options values are determined by using random numbers with the same standard deviation and distribution of prices as would be generated with the random number generators I just mentioned. Every trader on the floor uses such generators to predict the price that an option should trade at, and they do very well with this model– until something like the 1987 crash occurs and they go broke.

A famous former academic big options trader and head of the exchange said that almost all the scientific options traders he knew found that when you apply the random walk model to options, it turns out that puts are priced much too highly. He said that he's watched every last one of them go broke. The problem here is that extreme events tend to occur much more frequently than the random walk model would predict.

As I write, the Swiss franc recently jumped about 100 standard deviations above its last price in a few minutes, a one in a trillion shot, and billions were lost by option writers who used defective models to place their bets.

Andrew Goodwin comments: 

The error made is in the actual coin flip method versus the computer generated random flips. If you flip a real coin an infinite amount of times, then the side that is heavier because of a greater extruding feature weight will land more often on the bottom excluding unknown aerodynamic effects.

I hereby wish to debunk weighted coin tosses as fair. That includes the wear and tear on the coin that changes the weight. Over time, the side with the extruding images on the same coin wears down and you get closer to random results.

With the computer generated flips you get no advantage betting either way unless you game the random seed.

If you get Monopoly style game dice that are indented 6 times on one side and just one time on the other, then you are better off betting on the heavier 1 dot side landing on the bottom on a given role over large numbers of roles even if the edge is tiny.

I officially quite playing indented dice board games now.

anonymous writes:

One approach I have taken is to identify some price formation of interest that can be defined by quantitative rules (perhaps "inside days" or "upside breakouts") and then analyze that formation in an actual data series. If the occurrence and distribution of the formation in the actual data series is consistent with randomness, then I make the assumption that it is highly unlikely that the formation contains any additional predictive information.

Sushil Kedia writes: 

"A synthetic price series if generated using some function incorporating random numbers looks similar to a real stock chart"

Q1. Is every variable in that function taking random numbers as inputs? Q2. If A1 is no, then is any such function using random numbers akin to the error terms in the assumptions of a good regression model? Q3. If A2 is yes, then how does such a random number generated chart conclude that real markets are random? Q4. If A2 is no, then which parts of the synthetic price generating function are significant enough to conclude that the final outcome is really random?

Please allow a surmise to be placed on this table, before you tear it off:

The outcome of prices is a joint function of the random reaction to new information at that instant as well as a function of sensitivity of all participants to trigger or not to trigger actions on such moment by moment information updates. Sensitivity is again a multi-variable function comprising of but not limited to factors such as existing position (bias), risk perception (capacity to add or reduce risk at that instant), time horizon and so on and so forth.

Please allow just one more surmise on this table, for the moment, where I will unabashedly borrow from the Palindrome's famous idea of reflexivity. Markets have a feedback loop.

My arguments supporting the surmises:

Cause & effect thinking that is the cause celebre and raison d'etre of known forms of sciences has yet not evolved into modelling, evaluating or concluding enough about phenomena that have feedback loops as well as random reactions.

That's where art steps in.

Eventually as the long held and commonly accepted belief (derived from philosphical arguments) of this list has been that there is no possibility of any reward without some risk, since at zero risk the other side of the trade does not exist, all workable methods will have approximations and estimates.

If one method may or may not be better or inferior than the other, having a method is better than no method. If even in the illusion of forecasting better than randomness one can use a chart, any form of art, or any other mechanism to stay actionable in the face of risk and prevent oneself from ruin, then too randomness will allow one to get closer to being rich enough.

Finally I will quote two giants from this list itself:

Ever Changing Cycles as espoused by the Chair himself, refute any scope for any one method to remain superior or inferior to any other.

The Senator having said once to me that every Cigarette packet comes with the statutory warning that smoking kills and yet it is the user of that information who ignores it. So any method is not the bigger factor in performance, it is the user of that method.

Whether Technical Analysis appears archaic, has refused to involve beyond the simplistic and lacks the sex appeal of rigorous numerics, so long as it triggers a trader to be adaptive, manage his risk and makes one pay one's bills, it's ok. There are enough systematic quant funds that have blown up and the biggest blowout did happen when Genius Failed, since it refused to recognize the ever changing cycles. 

anonymous writes: 

A price chart is an attempt to model relevant aspects of price change. Price change is not linear displacement, whether vertical, horizontal or oblique. Nonetheless, price change can be represented as vertical displacement and time elapsed as horizontal displacement. Such a model, however, invariably supports relationships that does not correspond to anything in the original process.The angular inclination of a trend on a price chart is a visually striking feature of this representation. Such angles have no intrinsic meaning for the price series, but this is one of the many factors (along with our facility for pattern recognition and wishful thinking) that contributes to our interpreting more from price charts than rigorous testing reveals is there.

- William Eckhardt

Feb

10

How does one average down in prices paid for an asset one thinks will appreciate while knowing that the asset may turn upwards before one has met one's targeted optimal allocation in the asset? How does one prevent the adverse event to a speculator of only partially filling the trades that go on to create gains if one insists on scaling down in prices and has a maximum exposure target in this asset?

A commenter comments: 

Then of course, there's the time-in-trade/turnover factor, yes?

Feb

2

 Okay. What market situation is similar to The Seahawks decisions to pass with first and goal on The Patriots 1 yard line with 1 minute to go which pass was intercepted.

anonymous writes: 

Working a bid/offer to get flat with a profit ahead of an announcement only for it to come out 1 minute early and go the wrong way resulting in a painful loss.

Andrew Goodwin writes: 

That play call will go down in the annals of history as one of the worst calls ever. The folks who gathered to watch where I watched included one most vocal who cried for Lynch to get the ball to run. Many were calling for the run.

Let us call this a trick play that backfired. The deception factor was high but the pass call was otherwise a poor decision.

David Lilienfeld writes: 

Respectfully, with the benefit of a good night's sleep on it, I disagree. Go take a look at the defensive line. Where was he going to run. The line had been getting a surge. I'm not sure that's the exact passing play to use. A screen might have been better, but a run wasn't going to necessarily do the trick, and with time running down, an incomplete pass buys time for another play. Bad passing call, but going to the pass makes sense. Just not that play. Something a little harder for New England to read would have been better, though.

Chris Cooper writes:

I'm in the middle of reading Scorecasting: The Hidden Influences Behind How Sports Are Played And Games Are Won by Werheim and Moskowitz. The authors do an exceptionally good job of demonstrating how conventional wisdom in such situations can remain wrong. I would not be surprised to find that this particular example was a theoretically correct call which nonetheless always leads to opprobrium by the masses.

I recommend the book, and note that it is on the Chair's reading list as well. The insight into referees is particularly well expounded. Likely many market lessons.

Tim Collins writes: 

At the very least, you try the run. Lynch is truly hard to take down. Call time out if he doesn't make it. Use a QB roll out on 3rd down. Throw it away if not there. That would leave any play open for fourth.

anonymous writes: 

The play made sense in terms of clock management. It was about NOT giving a guy like Brady an extra 20 seconds to come back and beat you. Further, one must wonder why Seattle didn;t let the play clcok run down to :01 and call a timeout at that point.

A similar analog occurred at 2:02 left in the fourth quarter, when NE kicked off winning 28-24. I was certain they could kick the ball short, allow for a run back, let the clock burn on the play and then stop for the 2 minute nonsense, rather than giving away a pass play for free by kicking a touchback.

NE didn't do that of course, and by the two minute warning, the ball was at midfield.

The point is,running down the clock, or not, is not without its risks. The hypothetical — give the ball to Lynch, could have been a fumble as well. The game is comprised of such things, and no play is without risk, as is no trade, hanging out there by its lonesome.

Tim Collins replies: 

Fourth down play doesn't matter, so you have one run and one pass with the one time out. As long as my QB doesn't take a sack on the rollout, I'm fine. Plus, I thought they took too long to get to the line. There was 55 when they huddled up/lined up. Seattle took over 30 seconds to run that 2nd down play. Either way, I run on 2nd down. I'm stopped short and call time out. I now have roughly 20 seconds (plenty more if I actually get lined up in a timely fashion and run), so my QB rolls out. He is told to throw it away if there is not a wide open lane to the end zone or no one is open. As long as he does what he is told, I have plenty of time to run one last play from the 1 yard line. It doesn't matter what the last play is. I either score or the game is over as I will turn over the ball.

Sure, you could switch these and run the roll out on 2nd and the running play on 3rd down. I might even leave that decision up to Wilson based on his read of the defense, but these are my 2nd and 3rd plays. And, yes, I would run it again with Lynch on 4th down from the 1.

Pitt T. Maner III writes: 

My 2 cents and second guessing– Don't lead the receiver. Aim at his body so he boxes out the defensive back(s). The bigger and stronger the receiver you run across the middle the better. More chance of a defensive interference call. It was a play with poor execution. Lynch can catch the ball too as was seen– one would rather have him fight a rookie DB over a short pass. A fade to the corner with your tallest receiver might have been good too. It's all about size and position and ball placement.

Victor Niederhoffer adds: 

"Seattle Coach Pete Carroll Stands By Decision to Pass"

Scott Brooks disagrees: 

I disagree.

He had one time left and The Beast in the backfield. Run the ball twice and then use your timeout. At the very least, he Belichik would have been forced to call a time out to preserve the clock in the (likely) event that Seattle could have Beasted that ball across the goal line.

Worst case scenario, if you pass, do a fade route to the corner.

The Pats were stacked in the middle prepared to take on Lynch, why throw it into a sea of blue?

They even had time to do a play action and give Wilson time to improvise and still throw it away if there's nothing there. Then run two running plays and use the timeout in between.

It was a stunningly poor call, one that will haunt Carrol for the rest of his career.

Pitt T. Maner III writes: 

Think of the money involved (excluding endorsements and lots of other things): "This year, the salary bonus for players on Super Bowl teams has inched up a bit to $97,000 (up from $92,000 a year ago) for each winning player, compared with $49,000 for players on the losing squad ($46,000 a year ago). So the total gap between the game's winners and losers should be a bit higher than it was last year, when the difference was just under $3 million."

anonymous writes: 

Read a paper earlier this year that the most statically reliable goal line play was the slant pass. The least was the fade pass. In my observation the receiver needed to be about 2 yards deeper. He was too shallow to get separation.

Craig Mee comments: 

This reminds me of turning a winning position into a loser. We have probably all achieved this in a number of ways. Spreading off risk and turning over possession has got to be up there. I must include talking to a fellow trader and after the chat swinging your position from net long to net short, and watching the market go limit long.

anonymous writes: 

What about the quarterback sneak?

Would be good to have stats on how many inches/feet can be reliably picked up on a quarterback sneak, even if everybody knows it's coming:

"Around the time Pro-Football-Reference added the Game Play Finder in 2012, I used it to look up Tom Brady's rushing success in short-yardage situations (third or fourth down, 1-2 yards to go). The results were staggering. Including last season, in his regular-season career Brady is 88 out of 91 (96.7 percent) on these runs, including 56 straight conversions. That's almost as efficient as the extra point. After researching some other quarterbacks, I found that most of them had great conversion rates. This is largely due to the quarterback sneak, which has worked 85.9 percent of the time since 2009".

Jan

29

If only the Yale prof would realize that if (a + b) is positively correlated with c, and b is negatively correlated with c, then a is highly positively correlated with c. Also that earnings don't live in a vacuum and the best estimate of next years earnings is last year's + 10% not the 10 year average. When the collab and I pointed out the errors in his thinking, he said it could be an Ito process where all such relations don't necessarily hold, but he realized the gaps in his ideas and they weren't very important to him. Of course the main thing is that the professor has been bearish since 1965 suffering from the English disease that the main determinant of stock prices moves and variabilities is the dividend distribution.

Andrew Goodwin writes: 

A dividend distribution factor as a key determinant of stock price moves seems misplaced given the case of closed end funds that distribute assets instead of solely income as dividends. More on this subject might be of interest.

I have not studied the subject deeply enough to share a view yet.

Jan

23

The loss of a nail caused the loss of a war. It all starts with the horrific having two positions on opposite sides at same time. Worse yet is the use of mental stops with the idea that the broker can't read your mind.

Andrew Goodwin writes: 

Voice brokers know the locations of the stops and the times when they will make margin calls or force liquidations. The broker does not need to read your particular mind to know the levels that once hit will create more trading activity. Mental stops fail because a broker can extrapolate the actionable levels from the inside view of the collective levered positions and stops given by other clients.
 

Dec

5

 What the statistician traders miss is that the human brain is programmed to observe and create geometrical patterns. Since the observers admit to looking at price charts then they know that they might influence results.

Homo erectus was making patterns on shells long before today's speculators were trying to use patterns to turn a profit.

Apr

22

 12 insights about markets and life from reading Ken Roman's The King of Madison Avenue and The Unpublished David Ogilvy.

1. Be unorthodox and imaginative in your hiring. Ready to hire people with unusual backgrounds. Would you hire this man for an advertising executive? "He is 38 and unemployed. He dropped out of college. Has been a cook, a salesman, a diplomat and a farmer. Knows nothing about marketing. And has never written any copy. Is interested in advertising as a career at the age of 38, and is ready to go to work cheap." It was Ogilvy himself who 3 years later became the most famous copywriter in the world and built the eighth biggest ad agency.

2. Treat women as if they are as knowledgeable as your wife when you advertise to them. They don't like to be talked down to or treated as robots. Peter Lynch and Jim Cramer are not the only investors who got 10 baggers from their wives.

3. The purpose of advertising is to sell a product. Make sure you go for the sale. Forget about aesthetics. Learn from the mail order ads where everything is tested, and no ad continues unless it pays it way. Forget about the 3rd and 4th moments in your quantitative measures and concentrate on making a profit on your trades.

4. Don't show off or try to be funny. It doesn't go well in print. It demeans the readers' intelligence. If you show off in a trade or competition, it will defuse your energy, and take you away from the bottom line.

5. Always hire a secretary of the same sex as you to make appointments. It will show you're interested in business and not in romance. And it will prevent you from being too expansive if the romance doesn't work out, or too soporific if it does. You have to be alert to be successful in markets.

 6. You never know someone's character until the chips are down. Everyone's a good winner. Choose side men of unquestioned integrity, preferably eagle scouts, or those who follow the code of the west. Roman himself was not gifted by an excess of loyalty from his mentor when the chips are down. Don't expect your clearing firm to give you the benefit of the doubt in a tight situation. They have to worry about their stockholders and when you are down, there is ample opportunity for them to make a profit against you, the same way a poker player can when he knows you can't withstand a big bet.

7. Always be reading good biographies. Ogilvy was an incessant bio reader and used the lives of the greats as examplars for building his international operation. The best bio of a market person I have read is MFM Osborne's biography by Melitta Osborne and Tom Wiswell's proverbs. Both are available on the DailySpec.

8. Write 100 headlines and read everything about your competitors and your product before you write your ad. Be ready to test 100 systems until you find one that really works and is not subject to ever changing cycles.

9. Surround yourself with people that have talents that are different from yours. Ogilvy knew nothing about finance or tv or computers, and hired good people to fill in the gaps. If you're a macro guy, hire a micro guy to get you on the right track. The palindrome hired me because I could get him a tick or two, and that was enough to start the steam roller going.

10. Work hard. Oglivy supposedly worked 120 hour weeks, and drove his wives crazy by working all through the night. The little bit extra is the difference between success and failure. I won countless matches in squash by diving for shots while my opponents were apologizing for hitting it off the wood.

11. Be prepared with a good defense. Ogilvy wrote what Fortune described as the best sales manual ever for the aga cooker. In it he enumerates 10 common reasons for not buying the product and shows how to turn each objection into a sale. Are you ready on your trades to turn your losses into profits, to survive if it goes against? Prepare a manual of defense and stick to it.

12. Be ready to learn from and compliment your competitors. Ogilvy often walked out of a meeting and told the prospect to go with his competitor because the other side was better. Practical investment people can learn much from the academics, and the fundamentalists and the technicians should be friends.

Andrew Goodwin writes: 

I was thinking about what you said about how you shouldn't expect your clearing firm to give you the benefit of the doubt in a tight situation.

That doesn't make sense unless one gets preferable margin callings or the like due to status as a .01% large player. There is a mathematical sweep or a reg T margin from most brokers one can find who run a tight ship.

For my part, I'd like to see how the clearing firm traders use the customer position data. If you know someone is levered up the gills and has to post more money at certain levels, then of course they will take the other side if there are no Chinese Walls.

Long ago, I saw an indicator in print which showed the margin purchases versus the cash purchases of Merrill Lynch customers. When optimized it had reversion results that were nearly perfect for the many years preceding the printout.

If you know the margin call levels for the largest number of the public customers on Reg-T, then one should fade the mandatory liquidation levels once crossed with little caution. That's why you buy stock in brokers and hope they don't pay themselves all the trading profits in bonuses.

Feb

10

 If one hasn't noticed, the Olympic judging of figure skating has changed. One no longer gets to see how the judge of each country has voted on skaters' performances on TV. This change from a disclosed 6.0 scoring system by judge with country affiliation revealed to the new ISU scoring system creates the prospect of great unmonitored injustice.

No longer can we see the scoring by judge of each country for each performance. If one can't measure a scoring bias by seeing the country by country judge data, then how can one register a complaint as an athlete? This creates a de facto measurement method on par with that of a Court of the Star Chamber in use famously during the 15th until mid 17th Centuries.

Far from taking a step forward, the new scoring system, in reducing accountability of judges, increases their omniscience. One might argue that hiding the identity of the judges through the random selection of judges' scores might allow a judge from a non-totalitarian state to make a fair call. That would make the assumption that the judges aren't under some other type of surveillance or control.

Feb

7

 The latest contestant on the popular game show "Jeopardy" has found an unorthodox way to beat the game. Using game theory, Arthur Chu has managed to win 4 times in a row. His unorthodox methods have traditional Jeopardy fans upset as he follows the rules, but goes non traditional, and hits the big money first, then searches for the daily double. In fact, in one daily double, he found it in the category of sports (which he has little knowledge), and bet only $5. His style of play is to deny his opponents the big money, just like we try in the markets.

Anyways, Chu has upset the apple cart and won over $100K. Fans, along with the host Alex Trebec are visibly upset, but Chu is playing to win, not appease viewers or the host. This reminds me of speculators who get upset and blame HFT, flexions, the other side, etc. when they lose. They were mad at old man Rothschild when he had news of Wellington first and scooped the market. I'm sure that in the future, there will be many boogeymen to blame things on.

I applaud Mr. Chu for his out of the box thinking, and wonder why nobody has done this before, considering Jeopardy has had a 30+ year run. Mr Chu can teach us many valuable trading lessons.

Andrew Goodwin writes: 

This guy is a close friend of my gf. He has garnered much anger from the crowd. He has won four times in a row and is now being called the "Jeopardy Villain" by the press and fans of the show.

This is a take from the net describing his methods:

"What is Chu's game theory, exactly? While most players opt to stick with a single category and work through it from lowest to highest prize amounts, crossword-puzzle style, Chu begins with the most difficult clues in an effort to solve the Daily Doubles and doesn't hesitate to lay down the big bucks when he finds them in a topic he's familiar with. If the question belongs to one of his less-practiced knowledge categories, like sports, he'll only wager $5 and throw it away, knowing that it's off the board for his competitors. He also spat in the face of the $1-over wager tradition in Final Jeopardy, in which the extra dollar prevents a tie; instead, Chu intentionally bet to tie twice, though only once did he and his competitor (Carolyn Collins) both answer correctly and move on. This is not a humanitarian move, by the way, but it is a clever one (Keith Williams, former Jeopardy! winner and obvious math person, breaks it down for you in detail here.

Playing to tie increases your chances of advancing both because of game theory and mind-fu—- your opponent ("if your opponent knows you're going to wager for the tie, he might disregard a rational wager and go for broke in an attempt to tie you"). Chu is also quick to buzz in, which is perhaps the most useful Jeopardy! skill of all."

Chu has already won four games in a row and gets to compete again on Feb 24th. He is using game theory and statistics to beat the other opponents and has mastered them all so far using his unexpected system.

I suggest we watch to see if his play changes the behavior of the next opponents so that they match his tactics and alter the game show for good. This is the live popular culture version of the theory of ever changing cycles at work for all to see.

Far from a game of mere trivia knowledge, Jeopardy now is a game of greater complexity than thought previously due to the skilled tactics of Arthur Chu. Granted, I understand that Chu was considered a genius back in college, but he is not winning like Jennings in knowing all the trivia.

Adam Robinson would really enjoy this story.

Best regards, Andy

Jul

30

 If you are the trader getting squeezed and know it then you don't have to liquidate the threatened positions. What you do is rank the most liquid correlated positions and especially the liquid OTM options of correlated and liquid items and let the predator activity enrich you.

I'd like to see your answer on this plan about cutting the slippage and hopefully doing it near the point where they think they've got you and you can exercise options to hit back.

It's a military type tactic that suckers the predators into a trap. If one can slice and dice orders anonymously without a bank holding all the cards, one might make it work.

The trader getting squeezed has perfect information on the vulnerable positions and goes to the electronic and somewhat anonymous options markets to buy cheap OTM volatility explosion options in all liquid and related assets to soften the blow. Let's see the predators game the algo slicing and dicing of hedges while inflicting what they think is pain. They should pay off the victim of such a squeeze 2:1 at a minimum.

Victor Niederhoffer writes:

What do you people think of this? For reasons of loathing, and avoidance of squeezes, I have avoided any study or consideration of options for many years. 

Russ Sears writes: 

It seems much of the hedge cost is tied up in matching an exact date and risk of sudden jumps across the strike as that date approaches. From my experience hedging variety of equity indexed annuities (S&P indexed call options embedded in an deferred annuity). I believe the secret to not getting squeezed is to manage the gamma position under "normal" conditions by writing shorter dated options an buying slightly longer time positions. And manage the delta exposure by the different strikes. If you are long gamma you maybe shorter delta than you want after a big drop, this can be carefully reversed (sell long dated, buy shorter options) as volatility spikes.

While not endorsing the derivative expert's new book "antifragiles" (he is too long winded), I would recommend only reading the prologue. It is like exercising, if you practice hard the first order effect is to tear down. The second order is to recover. So you go long the healing process under healthy times to prepare for age and diseases. People dread the first order pain too much so they don't exercise and buy out of the money expensive puts.

What the expert misses is not only do you stress yourself to increase your ability to recover, you indulge your self after the stress, sleep, food and ice baths etc. if inflammation is too much. In the book he says he is on a fast of some kind almost always. But he also lifts weights walks and exercises. This is not healthy. It is as much about the recovery as it is accepting some first order pain.

Jul

8

TaurusThere have been a number of absurd studies over the transom lately. VIX has to go above 29% for a market bottom because that's what it's done at the bottom of other market declines. Equally ridiculous is that the average market decline when it's gone down at least 20% is 27%. What these studies fail to note is the expectation from a given level as of a closing price. They are flawed because of retrospection and perfect knowledge as well.

Lawrence Schulman writes:

I don't think those studies are absurd at all. The four big selloffs we had last August, November, January, and March had VIX going above 29. Right now the market has taken out the previous lows. So I think it is wise for anyone to have some cash on the sidelines since the probablity would favor another large VIX spike. As far as the average bear market's being down 27% from the top, I would have told an investor: when the market is down 20% from its bull market high — which happened this week — the likelihood is the market would not stop going down once it hit the 20% pullback. And on Friday the market was down 22% from its bull market high.

Andrew Goodwin remarks:

Seems absurb that a bell will ring at a market low, which was to be announced, according to multiple pundits, by a VIX move above 30. The markets normally confound attempts at bottom fishing by the masses. Those looking to the contrarian idea that an indicator so scrutinized by the public could not possibly work, and even citing the Heisenberg principle, were taken aback when the tool worked this time. This time was different because the smart money contrarians outsmarted themselves by looking for deception. The VIX lady really did sing at the end and it didn't convince all.

Dec

14

Esteem. What are the reasons that business people act as they do? One reason is the desire for profits. The second most studied reason is the sanction and guide of regulation and the law. A third reason, which is not considered enough, is the desire for esteem and the avoidance of disesteem. This topic is covered very well in The Economics of Esteem by Geoffrey Brennan and Philip Pettit. They consider how esteem is allocated and how it can be improved in the economy. Chapters include why we want esteem, the demand and supply of esteem, the economics of equilibrium of esteem, publicity, the intangible hand, and voluntary associations. It's mainly a diagrammatic and psychological framework within which the principles and non-mathematical tools of economics are applied. It should have great application to the endeavor of finding good companies and good managers.

VIX. With VIX at 9.7, its lowest level in 12 years, the jury is out. Will the new year, or the new expirations to be traded, lead to a change in regime? Usually decision-makers are not apt to change horses near the holiday season, especially in view of the bonuses gravitating down to the middle classes.

Torts. It's hard to do anything these days without thinking that fear of litigation is a driver of the customs and procedures. In hospitals, people in critical care are subjected to an endless barrage of red tape while in shock so that doctors can protect themselves from subsequent claims, including giving X-rays while life hangs by a thread. And of course autopsies are a thing of the past because they often are not paid for, and because of what they might reveal.

Happiness. The happiness that people forego to protect themselves from liability is often not accounted for in the cost benefit-analysis of third party payment schemes. For example, in squash, certainly the rule that one must wear goggles causes more accidents than it saves. And people can't remember the time when you could actually enjoy a game of squash and see the whole court. And many people have not taken the game up because of the wearing of goggles. Of course, the invisible hand explanation for such rules is the fees associations get from the manufacturers. More importantly, many have had their happiness quotient decreased. The same is true of car seat laws for babies. How much wasted time, how many cancelled trips? There are hundreds of other examples.

Antipodes. I spoke at Yale yesterday, a week after Professor Taleb had been there. And we have both adopted George Zachar's device of "your own man says it's so" to discuss the merits of what the other does, even though it is more than 99% likely that on any given trade in the pit we are on opposite sides.

Anthropology. The customs of various trading pits, and the movement from simple to complex rules, a subject anthropologists study, would also be good for speculators to consider. I am reading the Encyclopedia of Anthropological Theory and find in every chapter insights into the way people perform tasks in different cultures and times, and the way that markets work. The anthropology of markets should be studied in detail and not just in terms of the customs and norms that develop on the floor and how they affect the public.

George Zachar replies:

One of the peculiarities of the big dealer shops I frequented was their intensely tribal nature. The sales/trader types loathed the slick investment bankers, who in turn treated "the floor" with contempt. The bond guys thought the stock guys were idiots, and the stock guys thought the bond guys were dweebs. The salesmen thought the traders were calculating lying thieves, and the traders thought the salesmen were glib lying thieves.

Many of the failures I observed at these firms could be traced directly to these tensions, and management's inability to get all the horses to pull the twin carts of customer satisfaction and firm profitability.

I've always assumed the key to 85 Broad Street's stupendous success lay in creating and sustaining a culture/management/incentive structure that solved the tribalism problem.

Vance Falco adds:

I'll reinforce George's observations. In the late 1990s I ran a research desk on the trading floor of a small boutique investment bank. Our primary responsibility was to very quickly make assessments about news flow regarding the companies under the firm's coverage, synergize that with the industry analysts' existing research stance and get the perspective out to block traders and the institutional salesforce. It was very amusing to see the quickly shifting manner in which we were treated. When queried about the meaning of something, we were treated (generally) respectfully. The moment we weren't on stage providing the value added insight (we hoped), we slid back to being treated as simply consumers of others' potential compensation upside and our part in the larger process was lost. To the traders, we weren't rough and tumble enough. To the salesforce, we knew the research well but weren't glam enough to put out the firm's sales call. Second class citizens from every angle.

Yishen Kuik comments:

I just wanted to add that I've long shared the same observations.

My experience is that some institutions can be very balkanized and surprisingly ineffective at coordinating efforts. Additionally, not especially well organized to move talent within the organization, allowing it to find its best fit.

Having said that, the Grand Sichuan Bank does seem to have created a good structure/culture to deal with these issues.

Vincent Andres contributes:

This reminds me of a very very good book called The Naked Ape by Desmond Morris.

Considering we're just apes with costumes has often helped me to put things into perspective. I believe it's also useful to understand crowd behavior, because most new types of behavior emerge at common denominator points, and thus many such behaviors are of a very primitive sort.

Andrew Godwin extends:

Having played squash for over 25 years, I give the thumbs up to Victor's analysis of goggles. Rather than point out profitable liability management portfolio ideas to the public, shouldn't you instead go long the athletic cup manufacturers? The sport authorities don't make you wear those yet. The loss of family jewels in a squash match would count much more significant than injury to goggle-protected portions to males without children. Indeed, parents and grandparents would support such an initiative. Only current spouses or kids in divorce situations would object. The descriptive terminology of "family jewels" makes the point to savvy marketers. Self-evident points need expression in your form, apparently.

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