I've been thinking a lot about exactly that in recent years — what criteria should one use in assessing the assumption of risks? Recently, on one of the lists there was talk about mathematical expectation as the primary criterion for risk assumption. I've put together a little, unpublished paper on exactly that. I have it at http://ralphvince.com and the link is about halfway down entitled "Mathematical Expectation as a Criterion for Accepting Risks; A Foundation for Risk-Opportunity Analysis."

I'm very interested in the comments of people on these lists about these ideas.

 Steve Ellison responds:

Interesting paper. It is claimed that trend following is difficult to stick with. Some of those who went through the Turtles training program failed because they simply did not execute the trades specified by the method. One reason for the difficulty might be that the expectation set of trend following trades is many small whipsaw losses and a few big gains (roughly similar to the example in the paper with the signs reversed). The overall expectation might be positive, but the probability of being a winner after a small number of trades is probably below 50%.





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