An observation: Whether it be chess, table tennis, markets or whatever, people love to be on the attack and score quick victories that draw attention. I think it's an ego driven thing, the spectacular win helps people with their self image. Markets tend to go down faster than the go up, which makes the short the weapon of choice in this field. Chess players are forever wanting to emulate Mikhail Tal or Garry Kasparov and score quick victories, and table tennis players will play for winners regardless of the percentage they get in.

This would represent a systematic bias from humans in all fields plus a way of gaining an edge just about everywhere and anywhere. Find an egomaniac and do what they hate; defend instead of attack and play for the long game instead of a quick and spectacular win. Perhaps this equates to the chair's depiction of 'the house', but maybe it goes further?


Jeff Watson writes: 

The ego thing is real, and I suspect but cannot prove that the quick victory would pay short money. Back in the pit days, the frenzied scalpers would be in the market a few seconds and a good scalp might be 3-4 ticks on a 10 lot. Meanwhile, the spreader would be watching their position, adding to and subtracting from, and in a few weeks might make 100 ticks on a 1500 lot. Nobody watched the spreader because the scalper was making all the noise and grabbing the attention. Sometimes in life and the markets, the tortoise beats the hare. Fading a big ego is a tried and true strategy as long as one picks their entry and exit points.

Brett Steenbarger writes: 

What a great point!

The desire for the short (and quick market move) also comes from inability to delay gratification (lack of patience and the need to be gratified right away).

It also comes from a compensatory mechanism, where people who missed a large up move now look for vindication with a large down move. It never fails that, after a large market rally (such as we've had the last couple of years), traders trot out "the 1987 analogue" and the specter of a grand correction. I've yet to see a 1987 analogue proponent who made large money in the preceding rally. I've also yet to see a true replay of 1987.

Finally, it is surprising how many money managers let their political predilections shape their investment views. Many viscerally dislike the current U.S. President and have been steadfastly bearish through his tenure. The worst outcome for them would not be an economic or geopolitical cataclysm, but events that truly would bring growth and prosperity. Ayn Rand has written insightfully about "sense of life", and you have long noted the destructive sense of life of the permabear.



 I heard about a kid recently who broke his table tennis bat in anger after a loss. When his parents wouldn't get him a new one he stopped playing competitively.

My take on this met with some surprise–just get him another bat and send him back in there. If money is a problem take it from other privileges, for example trips to a particular eatery.

My reasoning is that competition, whilst having huge potential benefits, is tough and it needs time to learn to manage yourself within this kind of environment. Parents and coaches don't help if and when they stoke up the pressure with any kind of blame.




 One of the most interesting lessons I learned from Vic, and then during my time on the Spec-List, is how one can learn from people. Something that has been a particular surprise has been that we can often learn most from those whose values and ideas about things are most different to our own. The process of learning deeply from someone is an interesting one; it involves the withdrawal of one's own ego and a cessation of posturing to just listen and 'channel their thoughts'.

In my early days on the list I found 'Mr. E' quite fascinating. He seemed to go out of his way to offend people but at the same time was challenging their preconceptions. Our 'discussions' (for want of a better term) led to me channeling him on certain matters and causing widespread offense among left leaning associates. But thanks to E I developed a healthy skepticism about many commonly held views. And I remember him with affection and respect.

There have been other occasions where people were less thick skinned than E, without my realising or epecting it. I think I offended Larry Williams one time with an ill considered remark, and I'm not sure he knew I had read a number of his books and was trying to understand him. I hope he has forgiven me and will understand that I don't take an interest in just anybody.

Outside the list this learning attitude has also proven to be invaluable. I have become a much better chess teacher through an approach of 'deep listening' and learned tai chi by finding an outstanding practitioner and going through a similar process. I don't think he liked me at first and was unsure about whether to even take me as a student. But now, some ten years on, we are like family.



 My son and I took up table tennis last year and started taking lessons in July. One thing I found interesting was the body structure required in order to strike the ball with consistency, and actually it was highly reminiscent of tai chi. The upper body needs to keep structural integrity whilst most of the movement is generated by using the waist and groin.

It occurred to me that table tennis could probably borrow a training approach used by tai chi players and other internal martial artists, that of holding standing postures (known as zhan zhuang). This form of training is regarded as a major key to making progress, though needless to say it is not very popular. I wondered if standing postures had ever been used to train tennis players, the closest thing I've ever heard of being the training done at the Spartak Tennis Club in Moscow, where the young students practice shots without hitting a ball for the first three months.

We use key structures to master chess, with certain typical positions (characterized by their pawn structures) being regarded as the most important. Many moons ago the chair pointed out to me that this had similarities to the countist's approach to markets, that certain typical situations could be identified and that when they arose they were favorable.

Anyway, my question is this: Do other spheres also have sets of key structures to work on and do these represent a cornerstone to mastery? And if they are not widely recognized in a particular pursuit, can they represent a way of gaining an edge?

Karl Rove comments: 

Certainly in guitar playing this is the case, but it would be boring to explain to non-players. But it is similar to your positioning concept in table tennis, with completely different configurations of course.

(No groin action unless you are imitating Elvis, which is generally uncool.)



"Sneaky beetles evolved disguise to look like ants, then eat them"



Say that you have a yearly goal of 40% and you achieved in 7 months, or that you have a monthly goal of 10% and you achieved it in 11 days. Do you stop trading at this point? Or do you continue trading thinking the luck is on your side at the moment? Or do you adjust your goal and continue trading with the new goal?

Cheers, Leo

Victor Niederhoffer writes: 

The market will sometimes go much below your goal and to even things out you have to make as much as you can above your goal. Furthermore, the market doesn't care whether you've achieved your goal or not, it will always go its own way, and if you can make a profit on an expected future value basis, you should go for it. Luck is random, but the skill will persist. Apparently you or a colleague has it. Don't throw it out.

Andrew Goodwin writes: 

Your answer may rest in the structure of your money management operation. If it is a hedge fund structure, then heed the following points made in a post on the If you get behind you must know how you will deal with the moral hazard. Since you are ahead greatly, then your incentive is to take the money unless you know with some certainty that you cannot fall below a high watermark and will likely increase your gains.

1) The management fee, over time, usually does not generate enough income to operate and the profitable traders expect bonuses even when the overall fund loses.

2) The winning traders will leave to other firms or will start their own if there is no performance fee gathered to pay them.

3) If fund performance goes negative then high watermark provisions normally go into action. This can lead the manager to swing for the fences or simply close shop.

4) The wind down of the fund can deplete the investor assets and lead to general price markdowns of holdings especially if others had similar strategies and exposure.

5) The fleeing investors will enter into a new fund with a new high watermark and start the process over again.

Here is where the game gets interesting. The author suggests creating exotic option outcome provisions that he calls "Modified High Watermark."

These include A) Reset to zero under certain circumstances. B) Amortize the losses over a period so that the manager can still earn some incentive fee. C) Create a rolling period for the high watermark so that after a time the mark level drops.

His modified high watermark solutions might keep the manager from swinging when the performance fee looks too distant and might keep genuinely unlucky managers around until their skill manifests itself in due course.

Nigel Davies writes: 

There's a case for reducing leverage as one's account size increases so as to reduce the 'risk of ruin', and for some this might be done in a very systematic way. Another question is if there's a point at which one's financial goals have been achieved, especially if one's dreams lie elsewhere. 

Bill Rafter writes: 

You did not specify if your annual goal of 40 percent is based on analysis that suggests a 40 percent return is the mean or maximum. Let me assume that the 40 percent is the maximum annual gain you have ever achieved, if only as an academic exercise. Thus the 40 percent is your quitting point based on perfect knowledge of a particular system.

How frequently have you been calculating your forecasts (or inherently, your position choices?) As was learned from the Cassandra Scenario, "that more-frequent forecasting is inherently profitable, even more so than some forms of perfect knowledge." So:

(1) If 40 percent is your mean annual gain, then continue to trade at the higher level. That is, if you started at 1000 and now have 1400, continue to trade the 1400. Obviously it would also be good to shorten your forecasting period. (2) If 40 percent is your maximum expected gain, then pocket the 400 and start over trading with 1000. Shortening the forecasting period is not a given in this case.

Phil McDonnell adds: 

Let us assume the market has a normal distribution of returns and that the probability of making a 40% return or better, at random is 15%. Then if you decide to take all profits at the 40% level then your probability of a 40% gain will double to 30%. This result follows directly from the Reflection Principle.

The above assumes that your returns are random and implicitly assumes that you have no ability to predict the market. To the extent that you can predict then you should make your decision on your current outlook and not on any arbitrary price point like 40%.

Gibbons Burke comments: 

It seems to me that one should be disposed to let the markets give you as much as it wants to give you without putting artificial limits on that phenomenon, but that practical limits should be enforced on how much lucre it can remove from your wallet. Is more return ever a bad thing, assuming that the distribution of returns is not serially correlated? As our gracious host has noted, the markets have no idea how much money you have made or lost, so the idea of reversion to the mean on an equity curve makes no sense in the same way that it makes sense for market prices which are making repeated excursions up and down seeking the implicit underlying value of the thing (the ever-changing "mean" to which the market is always reverting.)

So, setting a goal to achieve a 40% return seems a reasonable thing to do, but I submit that this goal should be accompanied by the qualifier "or more" and be willing to let a good thing continue.

Regarding the 'limiting losses' idea, in the Market Wizards interview with Jack Schwager, Paul Tudor Jones admitted to having risk control circuit breakers in place so that if he ever lost more than x% in a month he would shut down trading for the remainder of that month. Limiting and rationing losses in ways such as this seem like a reasonable discipline if one is going to set limits on how the market will affect your stake.

An old floor trader's trick I learned while reporting on the futures pits is that if a trader enjoys a windfall gain on a trade, and reaches a pre-figured goal (or more), he takes half the position off the table as a positive reward for being right and taking action on that conviction. Leave the rest of the position on to collect any further gain which the market might want to provide, but he raises the stop to break-even for the remaining position (not counting the profits already taken off the table) in order that a winner would not then turn into a loss. If he stop get hit, he still has half of a windfall gain return in the bank. If the market continues in a favorable move and another windfall gain is realized, the process can be repeated.

This tactic has an anti-martingale character which some more bold traders might object to.

All these thoughts are mostly elaborations on the first two fundamental rules of trading: 1) let your winners ride, 2) cut losses.

Stefan Martinek comments: 

This loss avoiding behavior was well researched by Paul Willman and others. It is observed within traders of all levels approaching a bonus target; cutting off is generally viewed as irrational and Willman discusses how to adjust incentives to get a trader back to risk neutrality. Which reminds me more general but relevant quote from W. Eckhardt: "Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away.

Since the market spends more time in consolidations than in trends, it teaches you to buy dips andsell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough, to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run.

The general idea is that what works most of the time is nearly the opposite of what works in the long run.



 There's been much hand-wringing since the Great Recession to explain not only why the US economy hasn't grown faster but why the global economy is in such a morose state. Explanations include the overhang of personal/government/corporate (take your pick) debt, demography/aging of the population, central bank interference, among others.

Carder and I had a discussion today about this subject. Somehow, the topic of 9/11 came up, and he noted that we've spent a small fortune in responding to the security issues presented by that event. There have now been a number of other terrorist attacks in Europe, and I expect that there has been a considerable amount of money spent in shoring up security there, too.

I therefore wonder if the two aren't connected. First, the amount that was spent on security infrastructure and operations was not available for investment or any other economic use. Second, that the tightening/less open state of Western society in the hopes of creating a sense of security (in the pursuit of zero incidents) has created enough impediments to wealth creation in itself that the performance of Western economies has been rendered sluggish. To rephrase, that the West has, in its search for security, reduced the openness of the society that created the wealth which placed a target on the West in the first place.

If that hypothesis were correct, then the terrorists will have succeeded in at least some of their aims without having exploded yet another bomb.

I'm sure there are those who disagree with that hypothesis, likely including many on this list. I put the idea out here for discussion.

Nigel Davies writes: 

Yes, as Nimzovitsch pointed out, the threat is stronger than the execution. Much of chess mastery consists of the correct gauging of 'threats', defending by minimal means and keeping every part of your position equally weak (Lasker). The problem is that in a democracy the clamor for resources will not be based on this kind of logic but rather than influence over the electorate per unit cost.

Peter Grieve writes: 

Excellent point. Imagine a chess game where millions of people vote to decide the next move, and subgroups receive a different share of the winnings depending on which pieces are left on the board at the end. Laskerian principles might be hard to maintain in this case.

Not a perfect analogy, of course, but I think it hits Nigel's idea.



 It's not easy to find good books about chess for those who are beyond beginner level but are not yet serious tournament players. But here's a selection with which you can't go too far wrong.

1. Lasker's Manual of Chess by Emanual Lasker

This profound philosophical work is one of my personal favorites. Whilst it is not really a book for beginners, even rainy day players should be able to get a lot out of it in terms of understanding the nature of the chess struggle.

2. Weapons of Chess: An Omnibus of Chess Strategy by Bruce Pandolfini

Pandolfini is a fabulous author for those at post beginner level. This one is a book which presents strategic concepts but without needing a chess board. Adults can read it on their daily commute whilst kids can combine developing their chess understanding with reading practice.

3. How to Beat Your Dad at Chess by Murray Chandler

Chandler presents a selection of mating patterns and explains that chess is essentially pattern recognition. More tactics books and software are needed for excellence in this area but this one is a good start.

4. Silman's Complete Endgame Course by Jeremy Silman

The endgame is such a vital area yet very few books are accessible to less experienced players. Silman's work is a notable exception with this book giving endgames that you need to know at different levels.

5. Chess Fundamentals by Jose Raul Capablanca

Like Lasker's Manual of Chess this is one that Grandmasters can also learn from. For beginners it clearly explains key concepts in a lucid and understandable way.



 One is a terrible chess player. I can't seem to see all the tactics the way I do in checkers where in thousands of games I have never fallen into a trap, whose traps are at least as complicated and difficult to unravel as chess. However, occasionally I try to play a game online so I can help the 9 year old son in his games. When I do, I always find it takes me about 15 minutes to gain a base of operations for the trading. You see, the clicks are so similar. You move it up, and your opponent moves it down, and you both try for the same square et al. I believe this is the real similarity between chess and markets. The opponent is the same, and he's always trying to take the center from you and forcing you to the side et al.

Jeff Watson writes: 

In any free market transaction you need to have a handle on the inside of the mind of the opponent, just like you need to know the motives of the counter party to any trade of size you have on.

anonymous writes:

In chess and trading during these conflicted times one must:

focus on the process

keep their fears and anxieties in check

not worry about unseen threats they can't control

understand the nuances of conflict

center their decisions somewhere between "instinct and reason"

not defy the lessons of history

A game of chess is pure. It is a free market with a level playing field and a product of spontaneous action, not human design. Unfortunately, one cannot say the same in reference to the markets.

Nigel Davies writes:

It's simply a question of practice. My son Sam was far from being a 'natural' with chess tactics but after doing 70,000+ chess puzzles he's not at all bad. There's a nice example here starting 24.Nf7+.

The real beauty is that of systematic practice turning into mastery. Here he dispatches a stronger and highly experienced opponent with very good strategy and controlled tactics at the end, not bad for a boy who was bottom of all his classes a few years ago.

To master something it's important to break down the required skill into component parts (for chess you have tactics, strategy, endgames, openings and psychology) and work on each of these. Then the component parts need to be brought together via competition. Simple but it requires time, discipline and staying power.



 The best three minute episodes of my life have been at speed chess and survival. Chess is obvious, with the clock ticking, and in survival the elements are similar. A stranger meets a stranger on a bridge, narrow trail, or alley. They size each other up in the first couple seconds. There is an exchange of intent a la the Tactical Wheel of fencing. Then one person makes the first move that may be friendly or aggressive. In chess, you can always punch the clock, and start over again; however, recovering in survival may take longer unless your moves have been accurate.

Nigel Davies writes: 

There's a very good chapter on defending difficult positions in The Art of the Middle Game by Paul Keres and Alexander Kotov. Basically you have to do all you can to stay calm and keep your position afloat, never lash out in desperation. It could be that you'll lose anyway but your chances are better if you're calm and tough minded. Choose the move where you can't see an immediate win for your opponent and try to eliminate the greatest danger, sometimes the most dangerous enemy piece.

There's some good advice too in Mihai Suba's Dynamic Chess Strategy in that you can use a kind of psychological blackmail in that if your opponent has been attacking you present him with the chance for a won endgame. Very often they'll reject the lengthy but certain win because they think they should have more or have become too attuned to playing for mate.

Finally Emanuel Lasker in Lasker's Manual of Chess said that you should try to make every point in your position equally weak so as not to present a clear target. Make your opponent lunge and make the running, going forward is always harder and riskier.



 'Cyborg Chess' or 'Advanced Chess' is an area that might be of interest to specs in that humans are allowed to use computers during the decision making process. There is evidence that strong human players can add considerable value to pure computer play when the process is managed in the right way, for example Arno Nickel defeated Hydra in a correspondence chess match in which he used a regular PC against the the most powerful supercomputer in the World at that time. This event wasn't publicized as much as it might have been, but you can read more about Nickel and Cyborg Chess here:

Arno Nickel

Advanced Chess

I've experimented with 'Cyborg Chess' in correspondence tournaments in which computers are allowed. The results haven't been great, probably because I don't use deep calculation setting on the engine, but the experience has been educational. A major issue is in understanding where it is that I can add value as there's a temptation to either overrule what the engine recommends or be led by it indiscriminately. Probably a series of protocols would be a good idea but where does one start? Here's a provisional list:

1. Write down your list of candidate moves, in order, and then compare them with the top choices of the engine.

2.Consider whether this is the kind of position in which engines are likely to do better than you (ie highly calculative tactical ones).

3. Give greater weight to particular candidates based on point 2.

4. Check your top candidate(s) more carefully, perhaps using deeper engine settings, until a particular confidence level is arrived at.

It seems reasonable that different people might give a different weighting to their own choices versus those of the computer, but in either case it does seem that better decisions might be arrived at. In fact Nickel's achievement sort of proves that, and even if computers get so powerful that the more or less 'solve' chess the synthesis of man and machine should still have value in less finite fields.

Victor Niederhoffer writes: 

 "Cyborg Chess" by Nigel brings up the effectiveness of human versus
robot trading in markets. Certainly costs must be considered as well as
effectiveness the way it is in all the studies of robotic versus human
surgery. Apparently robotic beats laporofic.
There should be areas where the robots have to be turned off for the
evening where the humans could develop an advantage. It seems the robots
are forcing early capitulations in many markets which is presumably an
effect of their programs.

anonymous writes: 

To list just two of scores of regular robot shutdowns that one knows of:

1. On Sunday nights in the professional electronic FX markets (using HotSpot as an example), one only has access to prices from 5PM NYC time unless you get on the phone and call a counterparty direct in New Zealand or early Sydney.

This 'dead zone' is almost completely without 'silicon based entity' interference and often sees a reasonable range that goes unrecorded. A stint in that dead zone is a prized achievement for FX traders learning how markets 'really' trade. Much like time on the floor of an exchange, it is an experience that is dying off.

2. Each night at 5 PM NYC time the professional electronic FX market goes dark for a few minutes as the value date changes.

After reopening, the market making algorithms kick in first with relatively wide spreads that narrow quickly when the Carbon based life forms start to interact. The HFT 'order facilitation' ( Ha!) kicks in next.

What is of increasing concern is that the lunatics are running the asylum. Meaning that the firm's running the robots are deciding when and why markets open and close rather than some supervisory body. I guess this is more a question of nature versus nurture.

Arguably, there is some marginal information that is helpful, in an accretive sense, to the buy or sell decision–from the opening procedures of robot dominated markets.

The first order possibilities for testing might involve: number of transactions per unit time, rate of change of spread contraction, the epps effect All for relatively short periods as the robo-market opens.

At a practical level, and without investing what I know to be substantial funds to study this issue, I believe it still comes down to basic conditionality, expectations based on that conditionality and finally path dependency.

Additionally, the predictive nature or otherwise of the situations introduced into the price generation process by exchanges, that I have previously posted on - must be tested and incorporated.

Jim Sogi writes: 

 By their nature, cyborgs must look for fixed patterns. They have limited adaptability. Sudden bugs, unexpected changes, changes in cycles, and divergences will always surprise them. They can't anticipate. Their advantage is that they are as fast as their circuits, and comm allow. The unknown is how they perform in a complex system with other cyborgs and humans. As Nigel points out, a human can add value and beat a pure cyborg. Human foresight and understanding of human nature can add value.

Hernan Avella writes:

Machines keep improving, some moving away from brute force approaches…

"Deep Learning Machine Teaches Itself Chess in 72 Hours, Plays at International Master Level":

"Lai has created an artificial intelligence machine called Giraffe that has taught itself to play chess by evaluating positions much more like humans and in an entirely different way to conventional chess engines.

Straight out of the box, the new machine plays at the same level as the best conventional chess engines, many of which have been fine-tuned over many years. On a human level, it is equivalent to FIDE International Master status, placing it within the top 2.2 percent of tournament chess players"

Andrew Goodwin writes:

I still have my ticket stub from the match that Kasparov lost to Deep Blue in 1997 in NYC. Maurice Ashley was using the Fritz engine to evaluate the moves of the champion and the supercomputer in real time for the theater audience, as I recall.

Instead of making the next move optimization target the best calculable move, the supercomputer could make goal seeking calculations that lead the match to the most time consuming calculable end game for human competitors. It won that match with clock time to spare. That's the advantage.

The Chair's idea of a downtime for computer engines sounds sound for human comparisons.

Jim Sogi writes: 

I would challenge anyone to quantify what exactly is the difference between a cyborg traded market and a human traded market. Sure it feels different, but how exactly? How do the numbers trade. Are there less big blocks? Are there fewer round sizes? Are there fewer takers on breakouts, i.e stop buy orders? Where are the numbers on the table?

Hernan Avella writes: 

Difference? Generally speaking, most of the time, when bots are the market makers there is less friction, reduced bid-ask spread, more ability to get the trade done with less price disruption. Winners: longer term traders willing to pay the bid ask spread or less to get into or out of a position. Losers: human market makers who want to earn the bid-ask spread. They can no longer compete.



 Something I've been considering lately is how to combine different types of consideration that occur in different time frames. This seems to be an issue in both chess and speculation, for example stocks have a long term bullish bias which short term traders may sometimes forget. Chess meanwhile has thinking based largely on the calculation of variations, and this needs to be married with long term almost glacial changes involving the pawn structure.

The main issue with chess at least seems to be that the longer time frame tends to be sidelined or ignored, particularly in games in which it's 'all hands on deck'. So players often calculate like mad and lose sight of the 'big picture', often to their cost.

One thing that I've found can help is to set aside particular times for the different thought processes. Alexander Kotov, in 'Think Like A Grandmaster', reported that Mikhail Botvinnik tended to do this in his own games, considering 'strategy' (pawn structure) when it was his opponent's turn to move and then calculating variations when it was his own. I think this is a useful habit to cultivate, though it can be derailed if an opponent moves particularly quickly after a structural change has occurred.

It would be interesting to hear if any specs have comparable examples and how they organize their thinking to cope. Is there a decision tree, a simple heuristic ('trade smaller on the short side') or does everything just fuse together when enough experience has been gained?

Let's say that most fed/economy/war issues are going to develop over weeks and months and that we take a particular view (eg that QE will continue as and when needed until systemic failure). How does one then marry this with shorter term considerations, such as the Friday-Monday effect?

Anonymous writes:

Nigel, I think this is actually much easier in the markets than in chess.

Firstly, in chess, you are forced to make a next move at the lowest time unit. The clock is ticking literally. In the markets, you can always walk away from the table and choose to play at a completely different game where the risk/reward is more appealing.

Secondly, in the markets, it is very easy to implement a low pass or high pass filter. The simplest example is to use only weekly or monthly prices with no high/lows. Other examples of filters to allow one to see longer time frames including moving averages. Personally, I use multiple strategies at multiple time frames — and some of the strategies are canceling each other at any given moment. This requires extreme mental discipline to implement and maintain. But it results in a very different overall performance than focusing on a single timeframe.

Thirdly, in the markets, the game never ends. At the checkmate or resignation or draw, the game has ended. This end of game phenomenon directly affects risk taking choices and time horizon. I would hypothesize that the issue you raise is more similar to risk taking on games of chance like horse races (and the concomitant Kelly strategy) than on continuous outcomes.

Lastly, and most importantly, unless you are managing a massive amount of capital, one's "move" in the markets does not change the outcome. In Chess, your risk taking and behavior directly affects the future.

Jeff Rollert writes: 

Doesn't the "game" end when you close out a position? I could see the game continuing if you repeated a strategy, but the probabilities would be different, hence a different game.



 One played a game of checkers with someone likely to be a front runner for president in a few months, and we discussed the importance of Tom Wiswell's proverb "moves that disturb your position the least disturb your opponent the most". In checkers, I think it means not to break up your foundation, not to have too many infiltrator single men far removed from the bulk of your pieces. Not to have too many holes in your position. Not to have too many of your forces divided by big spaces. Maintain your dike which is a solid row of checkers on a diagonal of at least 4 or better 5 or 6. In general, make sure you have near neighbors for all pieces. I got to thinking how this applies to markets. It seems very applicable. Don't put all your chips at one price. Do things on a scale down or up. Don't move into other markets with big positions when you have the bulk in one position. Keep your positions at approx the same size. Don't throw all your chips in at a certain time, but gradualize into positions. Don't get out at close or in at open. Maintain a constant capital stream. Be humble.

What else would you say? How would it apply to life? Don't move into new investments unrelated to what you do without much reflection and gradualization. No staccato in your movements into your second childhood? What else?

Anatoly Veltman writes:

To add: a grandmaster can't use the same sole opening pattern all the time. High level competition will adopt– and they will no longer be disadvantaged. So while it's important to stick with your successful patterns– see if those patterns can be validated for situations arising out of a different opening sequence.

Nigel Davies writes:

I agree with Anatoly. Actually I've often given up opening systems at the height of their success; waiting crocs plus loss of vigilance etc.

Jordan Neuman writes: 

There is a similar thought in baseball strategy. In a situation where one's move will lead to countermoves, it is sometimes best to do the opposite of what your opponent wishes you to do given his perception of his own countermove options.

This is all under the general category of putting yourself in someone else's shoes. I find it very easy to see where others have messed up their or their children's lives. I would say my "win percentage" is much higher in those cases, prospectively, than in my own life. Perhaps the Wiswell proverb describes depersonalizing decisions as a way to make them less emotionally difficult.

Henry Gifford comments: 

Regarding the above about ruining the lives of one's children, my uncle used to say he ruined the life of his son, who was a heroin addict.

Looking at what he said from the other side, if what my uncle said was completely true, then parents have the power to stop their children from doing drugs or partaking in other ruinous activities, something many parents are frustrated to know is not true.

This perspective can ease the pain in some situations in life, and maybe in trading losses also.

Allen Gillespie writes: 

On the violin to play fast one must leave fingers down for the return.



 As $/Yen exchange rate slowly, but as surely as the Geiger counter ticking through 80.00 and toward its all-time record in 79-handle - one pauses and contemplates: is this supposed to be real or surreal?

Here you have a liquid, instantly tradeable 24-hour instrument, which may allow as much as 100:1 leverage to those who qualify and wish to indulge. You have country plagued by apparently irreversible demographic deterioration, now hit with quite a real prospect of not wanting any new pregnancy for decades to come, period. Its Central Bank can, is and will print this currency in perpetuity. Am I wrong in assumption that the only current bidders for Yen are Japanese multinationals, that must temporarily curtail their offshore enterprises in favor of domestic operations? And no one else…

Kim Zussman writes:

A biblical flood:  so much money it flows even where it doesn't belong.

Nigel Davies writes:

 If Japan needs to spend a lot on reconstruction whilst having little power to export then surely a strong yen makes sense.

Tyler McClellan writes:

It's not relevant to what you guys are talking about,

but of course the truth is precisely the opposite. To the extent Japan needs to get real resources from the rest of the world and can offer fewer real resources as recompense, it ought to offer a greater real share on its future production (which of course can be brought about by having a weaker currency).This is all just water on the bridge, but at least provides a reasonable basis for the conventional idea that the currency should weaken.

But these economic flows arguments are dominated by the change in the relative stock affects. There is a preponderant group of people who want to exchange a stock of dollar denominated assets for yen denominated assets. For purposes of this example, it doesn't matter that they dont know in which form to hold these yen assets (certainly not in stocks).

There is a meal for a lifetime here, but it is a complex one. It has to do with this observation, what does it mean for a given type of assets to be priced as the marginal equilibrium between buying and selling? Does this sensitivity to various changes of marginal preferences say something about the assets class and how partial equilibrium is achieved?

Perhaps I'm being not being clear enough, for the foreigner who happened to hold his worth in indeterminant yen assets, this constellation of events has been perfect. Why should that be the case?



 The hairs on the back of my neck stand up every time I hear 'positive drift' because the stuff they're being measured against (currency) is also in a state of constant flux.

It's amazing what a shilling (now 5 new pence) was worth a couple of hundred years ago; factor in various technological revolutions and huge population growth over the time this 'drift' has been measured and I'm not sure you can reasonably extrapolate it forward.



In case nobody has seen this, it's certainly worth a look. 80 year old Victor Korchnoi defeats 18 year old rising superstar Fabiano Caruana. It gives hope to us all…



This is a fascinating article with deep implications. Could politics represent an evolutionary struggle between different kinds of brains?



 A question from a novice:

Noting the general bearishness on t-bonds I'm wondering why someone would want to participate in a game in which both the bonds and the currency are controlled by the dealer (can't US inc print the money it needs to support the prices, as and when it needs to to keep China inc and Russia inc happy)?

I've played in a lot of tournaments where even the strict rules of chess can be severely bent to favour home grown players, isn't this one a whole lot worse?

Jim Sogi writes:

Well, at least it moves up and down a bit, unlike equities.



On the subject of parenting, one aspect that has forcibly struck me (very forcibly in fact!) is the opportunity for personal development. I've found that my time management and organisational skills have improved hugely since becoming a father, not to mention patience. One specific aspect may be particularly interesting from a speculative/chess point of view, the need to constantly improvise new plans and adjust my 'fatherhood game' according to constantly changing situations. I don't think it works to go in with an overly dogmatic and detailed plan, instead I've found it better to improvise within the overall mission statement of fostering junior's development.

This is certainly highly analogous to chess in which multiple adjustments are vital. And I wonder if this is also the experience of speculator parents.

David Hillman writes:

This is certainly true in traditional business and strategic planning. Basically, one creates a mission and vision, sticks a stake in the ground out on the planning horizon, develops goals and objectives, creates action items to achieve them, and proceeds. Then, at specific points or at random, one reviews and analyses data, i.e., produces feedback, measures progress against benchmarks, uses that info to re-evalute one's plan, then adjusts accordingly.

From the onset, we know the initial plan is pretty much smoke and mirrors, a wish list, as it were, as none of us knows exactly what the future holds or if the plan will be successful as written. In fact, if we're smart, we expect it won't be. It's essentially a road map, and as we know, Rand McNally doesn't illustrate every pothole in the pavement or provide up-to-the-minute traffic and weather reports in its road atlases. We only know about those things when we buckle up and hit the road, then we adapt our route and driving as necessary. If we do this successfully, we reach our destination, but it may be by a different route or in a different time frame.

Much as I've never seen a kid that came an instruction manual, I've never seen a kid that came with a proforma [if they did, perhaps people would be more cautious in considering parenthood], but I'm kinda thinking that, like applying geophysical models to finance, the basic strategic planning framework is pretty much transferrable across enterprises and that would include parenting.



 I don't have kids, but this article on "Why Chinese Mothers Are Superior" seems to relate to some of what has gone around before about raising kids and Asian children generally being ahead of the curve vs their Western counterparts.

Nigel Davies comments:

The Chinese authoress, Ching-ning Chu, described this tradition as '5,000 years of child abuse.

Steve Ellison writes:

Since the reaction to this article so far seems 100% negative, I will put in a good word for it. My (Korean immigrant) wife and I had a similar parenting philosophy, although not as extreme. Most American parents demand far too little of their children. I appreciate the author making the point that parents have a right to demand high standards and achievement.

My son attends a school for highly gifted students. Even among this population, some parents complain there is too much homework. By contrast, we hosted an exchange student from Korea in our home. This student while in Korea had gone to school as required from 8:00 am to 3:00 pm every day and then attended another school until 11:00 pm every night to get ahead in academics. This regimen is typical for children of families of means in Korea.

The author of the Journal article came to the US not from the People's Republic or a Chinese-majority jurisdiction, but from the Philippines, where there is a small Chinese minority that is far wealthier than the general population and is hated for it. The author's aunt was murdered by a mob during ethnic violence. The approach outlined in the article was probably necessary to survive in the Philippines.

Nigel Davies writes:

I see your point Steve, but to me the whole thing looked like an ill-tempered rant because the lady concerned attracted disapproval at the party she went to.

As a chess teacher I've taught youngsters from many different cultures. The ones I turn down flat are the pushy ones who have decided their kid will be a champion. The reason I refuse is simple - I've seen these kids burn themselves out as they try to perform well enough to be loved. On the other hand there are kids that genuinely developing excellence with full parental encouragement and support.

These two approaches may seem very similar but they're most definitely not; one comes with conditional love. And I think that it may be more valid to try and correlate the article's recommended approach with the kind of political regime that exists in China; brutality fosters brutes.

Laurel Kenner writes: 

I am reading Battle Hymn of the Tiger Mother, the book excerpted in the WSJ article for which Mr. Coyle kindly posted a link. Aubrey is taking Mandarin from a disciplinarian Chinese native, and I said I'd be interested in her opinion. Her reaction to the article: She was furious. She had grown up under just such a mother, and it wasn't a happy memory. Her mother would say, "I would rather have given birth to a piece of roast pork than you" to shame her, and the recollection still stung, years later. We may admire the Chinese kids for their "A" report cards, but they in turn envy the American ability to think "out of the box," innovate and found big enterprises.

I like Ms. Chua's style, and the book certainly is thought-provoking. I agree that the best way to self-esteem is to master a skill.

However, the short biography she provides in the book provides an unwitting clue as to the drawbacks of the Chinese approach. At Harvard, she was unable to ask questions in class, as her instinct was to simply take notes on everything the professor said. When it came time for a job interview for a Yale professorship, she found herself tongue-tied and wasn't hired. (She did get the job seven years later, after writing a cutting-edge book on how ethnic conflicts doom democratic majority rule in the Third World.)

Charles Pennington writes:

This is a fascinating and valuable book, which I've halfway completed. It is a defense of her unfashionable parenting philosophy, and she is not afraid to describe how it works in real life, complete with many anecdotes that make herself look bad. I think adults end up appreciating the special efforts that their parents made to impart on them a special skill. Maybe by now even Andre Agassi can appreciate his father's unrelenting efforts to turn him into a great tennis player.

I value the book because it gives me a realistic picture of the trying times that my wife and I can expect when we harness and over-ride our children's impulses and push them in a better direction.

The article has generated thousands of written comments, many of them harshly negative, even vicious. Ms. Chua gets some extra points in my book for boldness and bravery.

Russ Sears writes:

Beyond talent, it take a combination of the three c's of developing and spotting genius are commitment, confidence and creativity. The trick is that non of these can be crammed down a child but nurtured and grown. Further, children will react differently to anyone method so the instructor/coach must tailor the methods to the child. Last, but also perhaps most importantly, each discipline, talent or endeavor each requires a different combination of these c's and a highly expert opinion of how when and where to apply them, in order to obtain greatness.

For example a high bar, can create drive in one kid, perfectionism in another and burnout (as Nigel suggest) and pattern of quitting in others. As the Chinese example shows simply demanding commitment leaves even the obedient fearful lacking in confidence and reliant on the instructor to guide them stifling creativity. Teaching a child to love a sport, hence commitment is a necessary groundwork, and a parent/ coaches first job, but not sufficient. The idea that you can out work everyone is a fatal flaw to many scholars athletes and business men. The greats are all highly committed and their love and understanding will always out perform those that simply are counting on toughness and commitment.

Confidence, however, is only in moderation or it become hubris. It too must be developed and work. Testosterone can give a nature edge. Steroid abuse on the other hand may give a physical edge, but also tends to develop overconfidence superman syndrome. This is why I believe most of the athletes that get caught started taking them after they already developed some level of greatness. However, if you are to thrive in times of great stress rather than choke you must have confidence. Enough confidence that you do not over think the process or the exam, but enough practice, talent and knowledge than your instincts are spot on. The opposite of confidence is of course anxiety or unnecessary fear. 1 in 8 American suffer from an anxiety disorders. This therefore would be a good place to start in understanding how behavioral psychology effects investors.

Creativity by itself generally need disciple of commitment and confidence to be applied right. When to make the exception to the rule? When to trust yourself rather than the authorities? What is the right question to ask? Answer these creative questions correctly and you are on your way to greatness. Creativity however, often is either completely ignored in recognizing genius. Or it is often thought to be the only thing that matters. Both views kill the budding geniuses.

Jeff Watson writes:

Reading all of this parental preparation makes me feel like I dropped the ball as a parent as I did very little except to minimize hangups, teach my son right from wrong and allow him to be the happiest kid I know with a million friends and several beautiful girlfriends.. His mother was instrumental in making him into a scholar and she didn't have to work at it very hard at guiding his inquisitive nature as there was genetically coded DNA ensuring his "Knack" for the classics. There was an expectation that he would always learn, do well, think critically, and we were not done with force, coercion,punishment, or any other psychological devices. I was there to teach him to be a man, to do sports, surfing, skimming, and skating, shooting, archery, golfing,, bandage his knees and elbows and tape up knees and shoulders. I was also his biggest cheerleader, proofreader, outline fixer, and science teacher, who also taught him to cook and bake like a chef and prepare BBQ like a Black Southerner from Memphis.. My son might not have Mandarin under his belt, but he has Latin, Greek, Spanish, French, Italian pretty well down, both conversational and written. The jury is still out as his grad school is looming and we don't know what will be his choice. I offered him a year off after school just to hang out and surf before he either resumes his career or schooling. I wish someone had given me a year long surf break at his age as I think I would have done better in all my business because I wouldn't have been uptight for a couple of years. Of course, the theories of Galton correspond with my family and the previous generations , and I expect them to continue into the future. Hopefully, the children of the list members can also improve their progeny by marrying well, creating the right circumstances, and not pushing the kids into overload as there's a delicate balance. Just being members of the list is indicative that your kids won't be hanging out in pool halls, OTB, Illegal Pokers and numbers games, and that's a very brilliant head start that 70% of the fellow New Yorker kids can't get.

Yishen Kuik writes:

Perhaps one notion that might be useful is the "casualty" rate.

When we say such-and-such a profession is a "rock star" business, we usually mean that the number of winners in that industry are few, most of the rest are struggling, and the winners take a massively disproportionate amount of the prizes in that industry. The "casualty" rate is very high. Being a musician or an artist is a rock star business, being a doctor is not.

In Singapore, parents push their kids and will go to great lengths to sacrifice for their education. In general, we are a law abiding, conscientious, well educated and pragmatic people. However we are not known for thinking big, taking risks or innovation. And while most Singaporeans are close to their extended families, dining with them once a week, it is unusual that parents enjoy close friendships with their children. The relationship is largely characterized by respect and filial piety.

Because of this system of strong family networks, strong interest in pushing children and demanding academics, not many Singaporeans fall through the cracks
- we are a low casualty rate society. Not very good at producing rock stars, but quite good at not producing bums. This is great for kids who need the discipline and guidance and would otherwise grow up to be bums, but one could argue limits the potential of those who could have been great.

This has worked well for our small country - a stable system and a non-striking, non-unionized, trouble free and educated labour force has proven to be a winning formula as a service providing small nation that supports business between larger nations. But clearly this is not a formula for a large industrialized country, which needs to depend on the innovation of the few to create sufficient large scale value. Perhaps a system that sacrifices the many in order to locate and promote the elite few is the natural solution for an innovation driven large economy? I do not know what the answer is.

Nonetheless, Singapore is a very young country and has only been wealthy since 1980. I would expect attitudes between parents and kids to shift in the next generation.

Alston Mabry comments:

Very nicely articulated, Yishen.

An interesting thread overall.

I heard the author of the book in question speak briefly on NKR today and heard that the subtitle of the book is:

This is a story about a mother, two daughters, and two dogs. This was
*supposed* to be a story of how Chinese parents are better at raising kids than Western ones. But instead, it's about a bitter clash of cultures, a fleeting taste of glory, and how I was humbled by a thirteen-year-old.

Jeff Watson adds: 

I don't know, all these people drag out scientific ways to raise kids to be smart, to be champions. They push the kids pretty hard , aiming for Harvard, Yale, etc and one might expect some blow-back from that harsh regimen.. Fact is that parenting isn't an exact science and if you raise a responsible, happy, free from baggage, healthy, well spoken kid, you have 80% of the battle won.(I don't know what studies show but would suspect that well adjusted, happy kids probably do better in college than their non-adjusted peers) The schools previously mentioned like a story for admissions, and not the same story and school path and activities to get there that the great washed multitudes present them. So many in this world are competing through their children and I suspect that the outcome in this type of contest will not bode well for either child or parent especially if the child doesn't get into the first couple of choices..

Sometimes, a kid just needs to take an afternoon off, lie on his back and look up at the clouds and just imagine. Does a world of good in so many ways. If a kid is meant for an IVY school, he will get into an IVY school as there's always more than one way to skin a cat.

Jim Sogi opines:

Many modern children are horribly spoiled. It doesn't do them any good in the future. Their parent's are afraid of harming their delicate psyche's and end up with spoiled monsters that no one likes. You don't have to lay weird trips on them either, mostly that has to do with withholding love, or disapproval both of which create their own sick repercussions. A simple well defined set of expectations and rewards and time out or denial of reward is enough. Love must be unconditional. I see parents doing the absolutely wrong thing all the time, rewarding bad behavior and ignoring the good.

David Hillman writes:

I don't have children either, but I'm not certain having children is a prerequisite for recognizing common sense and good parenting. Is it that difficult to distinguish the difference between yelling at a child who's about to put his/her hand to a hot stove and yelling at a child skipping up the aisle at Walmart harming no one, i.e., just being a child? Or, what about a swat on the backside when a kid is being particularly rowdy and inattentive to commands to stop versus a backhand across the face to "put the fear of God in him/her"?

It was my great fortune to be born to parents who loved unconditionally and nurtured, yet they employed measured discipline and never spoiled. They told us "you can be anything you want to be and do anything you want to do if you apply yourself". The sky was the limit and we believed them. The only thing they absolutely insisted upon other than a "yes, ma'am" and a "no, sir", was that we were going to college come hell or high water, but what we did with our lives beyond that was our choice and they provided appropriate guidance. They led by example, not by threat of punishment and in the end produced a couple of reasonably well-balanced and self-satisfied [term used rather than 'successful' as the definition may vary from one to another] offspring.

Still, to this day, they occasionally lament their parental failings ["in retrospect, we should have…", "if we had it to do over again,……"]. While I, too, recognize some of their missteps privately, I tell them no instruction manual pops out of the womb with a kid, they were great parents, did the best anyone could, which was better than most, and I believe that to be true.

This discussion of parenting methods brings to mind a couple of items from long ago that provide contrast.

One, the clarinet lessons of my youth. Sister Mary Rasputin, a wizened, 4' tall 80 pounder taught me to play using the 'threat of physical abuse and eternal damnation' method. Her metronome was a 15" wooden ruler slapped rhythmically in the palm of her hand. She 'coaxed' exercises and pieces from my ebony Schmoeller & Mueller Bb licorice stick with red-faced, narrow-eyed, bared-tooth, shrill, 100db, spittle-laden complaints, insults, beratings, accusations and threats. Instead of motivating, however, I found intimidation worked quite the opposite with me. No matter how prepared, I dreaded the weekly 'lessons', hated the practice assignments and fell out of love with the clarinet. Eighth grade graduation, still a few years off, couldn't come soon enough. Yet, as it came and went, this instruction appeared fruitful as I wound up with 1st place medals from statewide competitions and was seated 2nd chair in the high school orchestra. But, I learned by intimidation and rote, didn't learn much about music theory until decades later, played mechanically, not with passion, and can't help but think I'd have been better off sitting in my room studying my Rubank Elementary Method and mimicking my Acker Bilk records.

Fast forward to interaction between two former mutual acquaintances. One was a very assertive sort who grew up in a middle-class family with a 'tough love' father, the other grew up in a somewhat disadvantaged but reasonably loving family. The former had had some business success, but even his own brother once told me "He's a great guy to be around, but I'd never do business with him." The latter had not made his mark at that point. He was ambitious, but more or less muddled through life looking for the 'big hit'. The former had material goods and proudly showed them off. The latter judged his own self-worth by comparing what luxuries he didn't have with what others had. The former often publically berated and ridiculed the latter in an effort to motivate him. The latter did not respond well. All the berating did was help him feel worse about himself than he did and perform poorly.

For one who is not a parent, it is still comforting and often poignant, and it gives me hope for future generations, when I see parents stopping in the grocery to quietly instruct a child on proper etiquette or behavior rather than employing a 'terrible swift sword' approach to discipline. And, I will frequently approach that parent and complement him/her on the obvious parenting skill. The reaction is always positive. I can't help but think that kid is going to be of more use to society than will one who's had good behavior pounded into them.

Yes, fear can be a strong motivator. We all know that and there are plenty of clear examples of success and heroics motivated by fear. In my own case, tho', I went to college and have done well because of it, but I haven't played my clarinet in years. A persistent nurturing and explanations of 'why' seems to have won out over terror in the long term. That was what worked for me, not a good skull cracking.

The point is there are many methods of parenting and of motivating and of instructing. I've had some parents say to me, "Sometimes you just have to say 'Because I'm the mom!', and I suppose that is so. I suppose also some kids need a 2×4 upside the head to get their attention. But not all methods work for all people. The trick seems to be knowing one's child or student [or employee or patient or spouse or recruit or client or you name it] and trying to recognize and employ the method or combination of methods that will be most fruitful. Not the easiest task and the stakes are often extremely high, especially in the case of child-rearing.

I always thought I'd have been a good parent. Maybe, maybe not. It didn't work out that way. I was either too selfish or not courageous enough to pull the trigger. But, I've compensated by becoming every kid's favorite uncle. And, since I've learned through observation the best kids are like the best dogs and like friends with boats… get to enjoy them, but they go home with someone else who has to maintain them, being the favorite uncle works for me.

Yet, I have great respect for those of you who have chosen to repopulate this planet with your 2.1 kids and thank those of you who take the time to know your kids and raise them well and give them the tools they need to help them grow into decent human beings. 'Cause what they become, how they behave, and what they do, will in some way impact me and all of us in some way, and that kinda makes them my kids, too.

George Zachar writes: 

No amount of common sense, good intentions, or book research, prepares one for parenting. 

Jim Sogi comments: 

David's advice to patiently explain in detail the expected behavior is the proper method of parenting. The common wrong method is to say, "No, don't do that." It gives the child no clue as to the proper behavior. Set expectations in writing. For example: Wash dishes once per week, or no allowance. This is clear, since the consequence is obvious. The wrong way is to say, "You're lazy and no good, and I will withhold my love if you don't help around the house more." It is too vague, and the repercussions are not commensurate with the behavior. Yet it is the common tactic I see over and over.



 Statistically significant ESP in a refereed journal. 

Vince Fulco writes:

Not exactly ESP, but I've been re-reading Kasparov's How Life Imitates Chess in the New Year.

On Intuition (p. 176):

This example is not intended to encourage you to blindly follow your gut instinct, or to rely indiscriminately on simple first impressions. As we've seen over and over again, diligent study and the gathering of knowledge about what came before in chess is essential to becoming a successful competitor. What I want to illustrate is the power of concentration and instinct. The biggest mistake I see among people who want to excel in chess–and in business and in life in general–is not trusting these instincts enough. Too often they rely on having all the information, which then force them to a conclusion. This effective reduces them to the role of a microprocessor and guarantees that their intuition will remain dormant.

Nigel Davies comments:

Kasparov was even one of the more intense and 'concrete' of champions. More relaxed players trust their intuition far more.



 I recently made a potentially serious mistake. I updated a web site and left it in a world writable state (i.e, anyone in the world could change it). Fortunately, a good friend noticed and fixed it temporarily while I scurried back to my computer to implement a permanent solution. Naturally one of the things on the web site is a page (by me) discussing the importance of a security mindset.

Mistakes are only useful if you learn from them, so I wrote up my thoughts on the subject. In summation, I set up rules, then broke some of them. Fortunately I had multiple layers of defense (stop loss rules) which made recovery easy.

In the bigger picture of my life, I see that most of the recent (last 5 years) decisions that I now consider mistakes are of the same sort. I had a rule or principle in place, then ignored it. At my age (50+) I'm not really getting surprised by much anymore; when I make a mistake, it's because I ignore what I know and charge ahead.

For example.. I REALLY wanted xyz, so I bought it despite the price, condition, etc, then did not like it, did not use it, broke it, etc. I was REALLY in a big hurry…broke something, ignored the rules, etc I was NOT going to ask for help/go back to the store again

So what strategies are there for stop loss rules, or layers of defense in life? How do you implement them without turning into a cold, heartless SOB? How do you identify reactionary rules (I'll NEVER do that again) that are not sustainable?

Time for some beginning of the year introspection. Here's what I wrote about this on my blog:

As I note in the overview, one of the things I want to focus on is security by design. Nice thought.

I switched from my hand crafted php scripts to Dokuwiki for the web site. Shortly after I pushed the web site out to the world, a good friend called me to say that the entire site was world writeable. Ooops… He was kind enough to flip it to read only while I scurried back home to fix it.

Obviously this was not a good outcome. I've spent parts of the last few days analyzing where I went wrong. How or why did I violate my principles?

- I forgot the rules. In the rush to get things done, I forgot to stop and think before I pushed send. The tyranny of the urgent got the best of me.
- I was complacent in my thinking. In the back of my mind, I knew Russ was watching things (or more correctly that his monitoring systems were). He is a very experienced admin and I trust his infrastructure.
- I did not think carefully enough about my actions. Sort of a variation of point #1, but I did not stop to think about what I was doing and the effects it might have.

In the end, even if Russ had not caught it, there was little chance of damage (other than egg on my face for a defaced web site). I've designed the site with defense in depth in mind.

- By design, the site is read only. It is the target node of the push. I never edit the site directly and never move information from the site back into the development environment. The content of the site is in a Subversion repo on another machine.
- I can easily repush the site from my secure repo
- The host that the web site runs on is not trusted by any other machine. There are no keys or logins on it that can be used on another machine that I control.
- OS level security in the form of SELinux is enabled.
- Logs are monitored
- The entire environment (OS and all) is snapshotted regularly

So the web site is in at least 3 sandboxes, each a little larger, each with their own monitoring system and recovery system or methodology.

Lessons to learn
- Think
- Use check lists to guide your thinking, especially when doing something new or different
- Have experienced people check your work
- Belt, suspenders, boots, raincoat, umbrella. Many layers work together to cover the gaps of each other
- Not only think before you act, but think about how to recover from a mistake ahead of time.

All in all, the best kind of mistake: small, relatively private, easily recoverable but widely applicable.

Nigel Davies writes:

One of the great problems with creating a lot of rules is that it simply gives you more to think about and these are usually not central to the activity itself. I believe that the only answer is to reach such a high level of mastery in a field that one feels an innate sense of revulsion when doing the wrong thing.

Easan Katir comments:

One important word for this topic: checklists. The more items from a list that can be computerized, automated, the better, the routine things, leaving one's mental capital for the important trading decisions .As you know, many working with high risk activities use checklists: pilots, some surgeons, etc..



 Emanuel Lasker always tried to forget as much as possible so he'd be fresh for any game. He was apparently very weak in opening games because of this. But the freshness was enough for him to be world champion for many years. Presumably Nigel would say that this is no longer possible. The degree of freshness in studying market regularities is probably a key as what happened x years ago is usually opposite in regularity to what's happening now, a variant of ever Baconian racing.

Jay Pasch writes:

This is a great piece of trading advice. Forget yesterday's game and concentrate on the airborne serve… 

Nigel Davies writes:

 Yes it would be much more difficult to go into major tournaments without extensive opening preparation these days. But I think it's still a good idea not to do this on the day of a game, and I tend to advise students to cultivate a repertoire that is fairly immune to surprises. This helps cultivate the balance and ease that Lasker felt was so important.



 Titanic Thompson by Kevin Cook is a deeply flawed book about a reprehensible man that has many lessons for market people. The deep flaws in Ty's persona are ably expressed by Herman Keiser, a former masters winner, who was just one of Ty's hired stooges, hired to pretend to be a caddy. "He was a thief," Kaiser said. "One day, at 80 he shows up at my house with a partner and two young girls. Herman, I've got a plan that's gong to make you rich. Give me 5,000, Herman." I tell him, "Ty, stay here. I'll be right back." I go to the house and get my 22 pistol. I come out and tell him, "Get outta here right now or I'm gonna shoot you."

Ty had no shame in cheating his best friends. When he was a sergeant in the army, he cheated all the soldiers under him out of their pay check. When in an old age home, he cheated all his fellow patients out of all their money. His father stole his mother's last money, and Ty treated his wives similarly. Worst of all, he fixed the game that Arnold Rothstein lost his fortune in and that led to Rothstein being murdered, when he welched on the deb on the grounds that he had been cheated.

And yet, there are many things we can learn from him. The first is the importance of practice. He practiced card throwing, dice throwing, horse shoes, shooting, and golf in line with the 10,000 hour rule and became the best in each of them. He kept records of the throws and was able to reduce the odds of throwing a 7 in dice with various dodges. He always made his proposition bets the kind that he had fixed before hand, and that could not be tested afterwards. I like the one where he offers to retrieve a golf ball from Lake Michigan 100 yards out in the winter where he marks many balls with an x before hand, and then retrieves one with an x, but no one is likely to swim into Lake Michigan and dive in to the bottom to test him. Or the time he bet that he could hit a golf ball 500 yards and he did on a frozen Lake Michigan, but he had the rules of the bet set down in writing before hand so he didn't have to hit it 500 yards on the course.

Also good was his trick of throwing loaded lemons and peanuts over a roof where the object he was throwing would disappear. His numerous proposition bets make you realize that you should never take the opposite side of a derivatives bet, as there is always something you don't know. The advice in Guys and Dolls about a jack squirting you in the eye if someone bets you it will, is a good one. Never accept a deal that looks too good to be true.

What a waste. He was so skilled. About the best golfer, horse shoe thrower, shooter in his day. He could throw a key through a key hole, and chip a put into a cup loaded with water so the ball wouldn't fall out from 15 feet, or flip 50 cards in a row into a hat 10 feet away.

What evil lied in this man, and how many men were ruined by him.

The best thing anyone ever said about him was that he would never steal or hustle all the money from someone who would kill himself afterwards. How fortunate that he died broke, hated by everyone including his son. And how the biographies show that evilness is inherited. His father and he were both the most evil of men, who thought of nothing but themselves and gaining money by any means and it runs in his family with his kids.

My favorite con of his: 

He dresses the best golfer of his generation up as a farmer. Has him driver a tractor around a gold course for a month, pitching manure, and chopping trees. Then he goes to the golf club where they've seen the farmer doing his rounds routinely and says he'll challenge the best two player in the club to a match, and they can choose any partner for him in the world. They choose the farmer. The farmer is a -4 handicap and they win and rush out of town.

Ty was very good with the gun, had to kill many people, and was often in jail and left for dead by thugs. Had to travel with a body guard as he was always cheating to win, and his fellow gamblers were as adept at marking cards, and using wires as him.

One con that he tells is hiring Harry Lieberman to feed him checker moves in a checker match against the best in Kansas city through a wire. Hard to believe that a checker player would do that, and the story doesn't ring true as supposedly the wire told him when a move was bad as he was wavering and touch move must have been played.

His cons remind me so much of the kind that the brokers play when they send you a big research report on a company or industry or country and then offer to take the other side of your trade. You are in the same position as the club people who insisted the farmer be his partner.

Gordon Haave comments: 

My experience when they offer to take the other side of the trade, if you press them, is that they say they are just a middleman and are offloading the risk on someone else. Or course as they own the fed, treasury, congress, CFTC, and FINRA they can pretty much do whatever they want.

Pitt T. Maner III writes:

A fellow Arkansan and famous pinup girl who also used the results of hours of practice to advantage :

'Jeanne Carmen was born in Arkansas in 1930 into a family of poor cotton sharecroppers. She ran away at 13, first to St. Louis, then to New York City, where she eventually landed a job as a fashion model. In 1949 she got an assignment to model clothing for Jack Redmond, a local golf pro and shop owner. Carmen, who had never seen a golf course, was modeling different outfits at Redmond's indoor golf range when he playfully asked her to take a swing at the ball. A lefty, she spun the right-handed club around in her hand and, with the back side of the club face, smacked the ball into the canvas backdrop, knocking it off its support.

"You sure you haven't played before?" asked Redmond. He then set up the backdrop again. "He had me stand on the other side of the ball and hit right-handed," Carmen recalls, "which was harder, but I knocked the drape down again."

Redmond asked her to come in the next day: "I'd like someone to see you."

The next day Redmond had the golf champion Jimmy Demaret watch as Carmen hit balls.

"They were oohing and aahing," she says, "and I thought, 'What's the big deal?' I don't think this is a very difficult thing."

Finally, Redmond said, "I think I can make a trick-shot artist out of you," and asked if she would mind coming in two or three times a week.

"Sure," she said. She hit nearly every day, sometimes for hours on end, for six months. Then she was ready.

"I could stack three balls on top of each other, which itself is very hard to do. I'd hit the middle ball 200 yards, the top ball would pop up and I'd catch it, and the bottom ball would rest, untouched. I could hit the ball 200 yards while standing on a chair on one leg. I could hit a flagpole 150 yards out."

She and Redmond traveled up and down the East Coast, putting on three shows daily at various clubs and earning upward of $1,000 per day. For their finale, she would have a volunteer from the gallery lie flat on his back and tee a golf ball between his lips; then she would drive it 200 yards without disturbing so much as a whisker.

Within a year personal differences ended this lucrative partnership. Carmen then met a dapper young man from Chicago, John Roselli, and moved with him to Las Vegas. Roselli was a lackey in the Chicago mob who helped run the Sands Hotel. When he found out about Carmen's golfing talents, he told her, "Look, honey, we're going to play a little game here." The way he described it, she says, "He said we're never going to take a nice guy. We're only going to take the assholes, and I know who they all are."

"I could hit the ball 200 yards while standing on a chair on one leg. I could hit a flag- pole 150 yards out…."
"Well, that sounds good to me," Carmen recalls saying. "What did I know?"

Roselli would plant her in a lounge reading a magazine. He'd sit at the bar, scouting for pigeons. Eventually he'd strike up a conversation and steer it toward golf and gambling."That's not so great," Roselli might say. "Even I could beat that." Then, pointing at Carmen, "Hell, even she could beat that."
Says Carmen: "And the guy might say something like 'Maybe in the bedroom but not on the golf course.'"

Wanna bet?

The group then would go over to Carmen, who, pretending to be a stranger, would innocently agree to be a pawn to their betting proposition. Dressed as provocatively as the era would permit, she would stand on the first tee and spin the club around in her hand, feigning to have never played before.

"I'd hold the club all wrong and then duff it, or slice it, whatever. After a couple of holes the guy would say, 'This is getting to be a bore. I'm going to win this hands down.' And John would say something like, 'Give the lady a chance. Give it a few more holes.' And then I'd get a little better and a little better. Until right at the end, when I'd start reeling them in. We'd win every time. They never knew what hit them."

The two worked the scam for about a year, until one day when Carmen slipped. She'd had a drink while waiting for Roselli to set up the mark, and, a bit tipsy, started playing too well too soon. The man knew he had been set up. "He was carrying on, complaining," Carmen says, "and Johnny said, 'Look, pay up, you lost the bet. Pay up and let's call it a day.' But this guy refused."

Roselli told Carmen to go to her room; he'd call her later.

"He then roughs this guy up. He calls me and tells me to get to the roof of the Sands Hotel. I get up there and open the door to see Johnny toss this guy over the side. Oh, my God. I'm in shock. I'm crying. So Johnny says, 'Come over here and look.' I didn't notice that the guy had a rope tied around his ankle. I go over and see this guy dangling down there… . He pulls the guy up and … Johnny's got his money and cuts the guy loose.

"Right then I decide I'm in too deep. I had to get out of there. I go pack my things." She moved to Los Angeles and became a star in B-movie potboilers such as Guns Don't Argue, Reckless Youth, and Born Reckless. '

Jeff Watson writes:

 I'm not a chess player, never have and never will be one. I know how each piece moves, a little strategy and that's it. However, school my best friend was a solid chess player and a member of the chess club, however ranked kind of low on the totem pole. I heard of a surefire method to beat a whole group at chess without cheating and ran a proposition against him and a bunch of the guys in the club. I bet him and the guys that I could play chess against the club and win at least 50% of the games, no draws allowed, play each game to the conclusion, and also beat the process;. We commandeered a classroom and set up 16 chess boards on desks in a circle around the room with me in the center. I assigned different numbers to different tables and when one would make a move, I'd make that exact move on another player. In reality, they were playing each other, and I was just the mailman. I won exactly 50% of the games and I beat my roommate by having him play the club champion. I couldn't believe that they fell for that one, but I made the bet so high that their greed made them irrational and the took the bet hook line and sinker. If that is cheating, that's up to someone above my pay grade. I thought it a clever bet, like most of my props but never used gaffs only percentages, exact terms, paradoxes, math, or physics to win. The lesson here is that one can make a bet so high that people will take it, especially when they think they have the edge. If one makes a really, really high bet, the edge better be huge. The best prop hustlers play games that they have an edge in, play it for freeze out, and let old man vig grind away at their opponents stack. Small prop games like flipping coins can be played for loose change, you will have a very high edge, and your friends will be delighted and amused, thinking you're clever, while you take their money. Gotta let your opponents win sometime as someone once said, maybe it was Runyon that "While you can shear a sheep all the time, you can skin him only once."

Nigel Davies comments: 

This is an old con that was repeated on TV by Darren Brown. I'm sure that the assembled titled players knew very well what was happening but they must have been getting well paid to get them to wear suits! 



 I wonder what is the level of dedication required to 'succeed' in different fields. I hypothesize that certain areas have such incredibly high standards that childhood beginnings and incredibly dedication are mandatory to acquire any kind of level (music and chess come to mind as good examples). On the other hand there are those with low general standards in which major players can start in the teenage years and later and yet nonetheless make a living from (eg poker and markets).

The main factors which delineate such fields might be the barrier to entry (any fool can push a buy or sell button, regardless of experience, whereas not many people will draw an audience to hear them play the piano), though with markets I suspect standards are especially low because the industry has had a strong focus on fees rather than excellence. And that's without considering the 'Madoff factor' (cheating in its various forms).

I suggest it follows that one should bring ones children up to excel in weak fields rather than strong ones, so maybe we should dump such worthy things such as violin lessons in favor of a pack of cards…

Pitt. T Maner III writes:

Unless you are talented like Shirley Temple, online is the weak field where the kids appear to make the money.

You need a good idea and a programmer in Romania.

Jonathan Manzi (born 1991, Beverly, Massachusetts), an American entrepreneur, is known as the youngest person in history to attain a net worth exceeding $1 million via industry, doing so at the age of 16:

OK, this is quite an accomplishment. Where does this entrepreneurial streak come from? It's almost as if I was born with it. When I was 6 years old, I was collecting rocks and painting pictures on them, and trying to peddle them down the street to an art gallery. I started a shoveling business when I was 8. Did your parents influence you? My dad is a civil engineer, and my mom is a nutritionist. They're very hands-off, which I think they know I like.

Jeff Watson writes: 

It would be a crime to dump things like chess and violin for kids. They still have their elements of grace and beauty. But the market and simple economics, the invisible hand of Adam Smith, is making its move. It should be noted that the top poker player that was 100th last year in earnings (Howard Lederer) made $1,526,000 in tournaments alone, not including side games. Incidentally, the leader in poker made $12,000,000 last year playing only in tournaments. Professional violin players can expect to make $75,000-$100,000/year in a very top orchestra. However, very little information is available on the average remuneration of the highest paid violin players. As a child, I elected to play the guitar, becoming semi-competent. We had a high school band for awhile where we might make $75.00 a night for the entire band playing a 2.5 hour gig (we were really bad).

On the other hand, at the same time I could play a very tight poker game and expect to grind out at least $50.00 and the economics dictated that I concentrate on playing poker. It is as tough to become a solid poker player and takes as much talent as it does for any musician. One caveat, all my money was earned fair and square then usually very quickly deposited at Hawthorne, Arlington, Sportsman's, or Maywood Park. Perhaps I would have been better off in the rarefied atmosphere of classical music,but I sure had a helluva lot more fun grinding it out on the felt then blowing my stake on a 40 to 1 shot sulky in the 7th at Maywood. As a kid I was an attendee of the opera, symphony, theater, ballet, poker games, and the track. The poker games and track won hands down. There's no words that can describe the thrill of standing at the rail on a cool but sunny afternoon, tickets in hand, with a dozen horses thundering past you where the ground literally shakes beneath your feet… It's indescribable, but you haven't really lived until you've experienced this joy.

Lawyers regularly bill out 60-80 hours a week and are under constant pressure to increase their work load, especially in a firm where they're trying to make partner. Dancers work a 6-8 hour shift, with maybe 5 stage dance routines per shift in a club(please don't ask how I know this). In a decent "Gentleman's Club" the dancer can earn as much as a lawyer will make, tax free. While dancers face risk from ex-beaus etc, lawyers are murdered all the time by ex-clients. Arguing whether dancing or lawyering is better, or which profession is more noble is a moot point as money has no conscience as long as it's legal and as far as I know, dancing is just as legal an occupation as being an attorney. Plus, most dancers have higher ethical standards than some lawyers I've encountered.

Nigel Davies adds:

This explains why classical musicians don't earn much; their art requires a highly cultivated palate to appreciate. Top chess is the same, you need a REALLY strong player to even start to understand what's going on. This makes a huge contrast with, say, poker and snooker where the strategies are very simple so they can easily be followed.

Stefan Jovanovich writes:

Snarks for a morning:

(1) Mozart would be writing scores for movies and television - which is where the only real money is for composers.

(2) The competition in professional sports is far, far greater than it is in classical music - which is one reason why football - both varieties - has more millionaires; the footers put on a better show

(3) When Ulysses Grant said that he knew two songs - "one was Yankee Doodle Dandy, and one wasn't" - he was showing his usual wonderfully modest sense of humor and teasing journalists about the fact that "taste" in music was a matter for individual opinion (like Jeff's), not social approval by Henry Adams and the New York Times. It is not surprising that few people now get the joke, for the United States has gone from being an absolutely music mad country (every regiment in the Civil War had a band) to one that is not. In the middle and late 19th century, and everyone was expected to know how to play an instrument just the way they are now expected to know how to drive a car. Any decent-sized town (20,000 people or more) had a Handel and Mozart society AND a Bach Society.



I believe being good at music is highly dependent on the nature of the practice put in and when someone starts. The young develop skills faster because of healthy myelin production (see Coyle's The Talent Code).



 Since the Chair mentioned Dr. Shinya three times in the past 24 hours, (as a humble omnivore) I fell compelled to point out that the counting here doesn't pass the "smell" test. Given the subject matter, failing the smell test is serious, indeed!

Chair wrote: "dr. shinya would also recommend based on his personal completion and examination of 400,000 colonoscopies with dietary data on each eliminating all dairy, and meat from diet…" He also pointed to the wiki link.

Wiki actually reports that Dr. Shinya has performed approximately 300,000 colonoscopies and, since his breakthrough in 1971, has performed a colonoscopies every 20 minutes.

Let's do the math:

1. Dr. Shinya is now 75 years old. He performs 3 procedures per hour for 8 hours per day (no lunch or rest), five days per week, 52 weeks per year. That's 24 procedures per day; 120 procedures per week; 6,240 procedures per year. This is improbable, but let's continue the arithmetic.

2. Let's assume that he has never taken a vacation; never gotten stuck in traffic; never played a round of golf; never taken a sick day; never given a speech; never done anything at all except perform colonoscopies FOR THIRTY-EIGHT YEARS. I feel sorry for his family, yet even so, that is "only" 237,120 procedures.

The only way one can get to 300,000+ procedures would be to assume that he is performing colonoscopies for 365/7/24….and if this is true, it raises even more serious concerns about his judgement.

I am skeptical about taking advice on ANY matter from a person who has spent the last 38 years looking into peoples' colons to the exclusion of every other activity. The saying goes, "To a hammer, everything looks like a nail." Dr. Shinya takes this aphorism to a deeper level.

Jim Lackey adds:

From medical student forums online

"Hi theremy, chief resident said in private practice he'd be able to do 35-40 Gas/colons a day easy on a 9-5 list with an efficient OR setup. Has anyone seen this being done. He said when hes's done with his residency he could pull in 15-20Gs a day doing just gas colons. sounded a little outlandish.


"A single person can do 30 -40 scopes per day. I am telling you…..a majority of scopes are screening scopes, and take 5 minutes……the next pt is in and you can easily do 5-7 cases per hour. I have seen this. It is a very busy day, and do not forget, like a surgeon, GI doctors do not scope every day. Usually only 1-2 days per week. 25-30 is very easy to do in a well functioning private practice. Get out in the real world, out of academia, and you will see this for yourselves..Breaking upwards of 40 scopes requires lots of committment and a very good functioning clinic….But 30 is easy for a good colonoscopist……"

"As an anesthetist, I am joining a private group this summer which covers a GI group. 30-40 colonoscopies is indeed very doable. More than a few groups I interviewed at were involved in this, as it is very lucrative for anesthesia as well the GI docs. These places are very efficient, and need to have a very good phase II recovery protocol in place. Some GI docs still sedate themselves, using an opioid plus a benzo. However, it takes time to titrate to effect safely, and recovery may be up to a few hours in older patients. The centers doing 30-40 cases per room per day uses an anesthesia staff, and use, for the most part propofol only. 50-100mg of propofol iv, is sufficient for most colonoscopies with no other meds given. A good colonoscopist is done in less than 10 minutes, often 5 from the time the scope goes in. The anesthesia bill is separate from the GI docs bill, so once the GI doc sees how efficient this is, how much happier the patients are, and mostly how much cash they are raking in, they love having anesthesia handle the seadtion. It can be a very nice way to offset non-insured patients and can boost an anesthesia practice's income tremendously. Typical reimbursement is 500-1100 in the greater NYC area."

It's "possible" and more likely he's the Henry Ford of the procedure. Hades, you can show up to one country, hit one hospital, and have thousands waiting for the scope. He was the innovator. But the mean seems to be about 775per year a week and 16 per week per Dr. who scopes 2 days a week…for profit. In the US of A.

So I see what you're saying– a local Dr group barely can do so. The only reason I believe it was in the Military you can line up 3,000 men and a few Docs and medics can perform assembly line of so many procedures in less than a full day– it's wild…and if youve ever seen a mash unit… a full blown surgery unit in the middle of the desert…then you know it can be done. Luckily I only needed stitches, but the level and the ability is amazing. Doctors are trained to work 24-36 hour shifts so pulling 5-12's and supervising a team…. Think "chief surgeon" not local private practice.

Victor Niederhoffer writes:

To my credit the last time I visited with Dr. Shinya, I subjected him to a withering cross examination to verify the 400,000 colonoscopies he claims in his books. He gave me a enumeration, and then dismissed me with "I have to see patients. I can't waste my time with people who don't understand medicine." I have always found that the worse the bed side manner of a competent Dr., the better he is at curing. I believe this the case with Shinya.

Rocky Humbert writes:

I have no personal knowledge of Dr. Shinya — but these sorts of claims are eerily similar to the sorts of results reported by Madoff.

Even Shinya's response to Vic's cross examination is reminiscent of Madoff's response to the SEC field investigators.

Consistent, remarkable, implausible performance/results that defy logic or reason … and which improbably persists for years…should cause one to raise one's antenna. This is true in every field of endeavor. (And I'm an optimist!)

Nigel Davies writes:

I read Dr Shinya's 'Enzyme Factor' but found Dr. Servan-Schreiber's 'Anti-Cancer' much better and more thorough on many levels. As a clinical professor of psychiatry who was diagnosed with brain cancer, he undertook extensive investigations of cancer mechanisms and how food/lifestyle can prevent it developing. All of us have cancer cells in our bodies but this disease tends to develop in favourable 'terrain'.

Please note that I've not been diagnosed. But a quick look at the odds makes a convincing case to adopt certain measures in the interest of attempting an extended life span. This is very chess btw; Nimzovitsch, prophylaxis and forcing them to take carry you off to the netherworld kicking and screaming.



 The accepted view of incentives is that carrot and stick dominate the human psyche.

But the book Drive (Daniel Pink) provides a cogent argument for their working only with boring repetitive tasks. More worrying is that they can even reduce the motivation to be creative by turning a passion into a means of subsistence.

If this is correct (and I think it is) the implications are very far reaching because it cuts across the way we have organized so many of our systems (economic, business, political).

Much food for thought. 



 Obama to award Warren Buffett Medal of Freedom

WASHINGTON (Reuters) – President Barack Obama will name Warren Buffett as one of fifteen winners of the 2010 Medal of Freedom, a White House official said on Wednesday.

Buffett, one of the world's most successful investors who has donated a vast chunk of his multibillion dollar fortune to charity, will receive the medal at a White House ceremony early next year. The award is the highest U.S. civilian honor.

Buffett is one of Obama's closest defenders in the business community and the president has sought his counsel dating back to the 2008 presidential campaign and since.

Nigel Davies adds:

A person in Sage's position would be wise to support both sides so that whoever wins will be grateful.

Scott Brooks comments:

Whoever wins will go to him with cup in hand. He's a "made man".

Jeff Watson shares:

Barry Ritholtz, on his blog, crafted an excellent parody of the Oracle's thank you to Uncle Sam note in the NYT.

Scott Brooks adds:

We as a nation have foolishly allowed the federal government, which was set up to by the states to serve the states and endowed with less than 20 enumerated powers, to exceed it's mandate. Today, we not only have a nearly omnipotent federal government, that is controlled by two political parties that are only nominally different in key area's (i.e. they are taking different paths to the same destination), but we have a single leader that is so powerful that our entire country revolves around this one man, regardless of who "he" is.

We are learning the hard way that when we put together a "gang of voters" to elect a person ("our guy") to give us favors, that we are endowing that "office" (position) with the power. And when "our guy" is no longer in the office, power to "give favors" doesn't leave with him, they stay with the office and are/can be used the person who occupies that position next.

That is legacy of Lincoln playing out before our eyes. He saved our nation is a contiguous geographical/demographic cohort, but the ultimate legacy of his power laid the groundwork for what we are as a nation today. (that noise you just heard was Stefan's head exploding.)

Stefan Jovanovich responds: 

I can't argue with Scott about the disease– imperial Federalism; but he and I will always have very different opinions about its causes. Lincoln had no actual legacy; that is why he was a safe saint for everyone who wanted to ignore the 14th Amendment. Anyone who takes the trouble to watch Birth of a Nation will see that. What makes my hero, Grant, a universally-reviled figure is that he was willing to use his powers as Commander in Chief to enforce the individual rights granted to citizens by the Constitution (which is what the powers are there for) and, at the same time, he had no taste for having the government "manage" life in America or the country's money. The Big Lie in the tradition of American conservatism is how much the doctrine of "states rights" was about imposing slavery on the territories and free states by using the Federal power and how much it continued to be about keeping the darkies down and those awful immigrants away from our shores. Conservatives were more than happy to extend government's reach for those purposes. Roger Taney's career– first as the enabler of Jackson's "spreading the wealth around" with the state banks and then as Chief Justice - is the best evidence of this unavoidable historical truth.

I know it does not fit Scott's construct, but it is what happened. Thanks to Grant and his Republicans, the Federal government had far less power of citizens' lives in 1890 than it had in 1848; and, if you exclude the political tyranny over black citizens, the country's government as a whole was not only smaller and less expensive but also less authoritarian under Harrison than it had been under Polk. The modern expansion of Federal authority has its sources in the two World Wars and the Progressive reforms in banking and trade laws that preceded them. Lincoln can rest in peace. As for my head, the only thing that even gives it an occasional ache is the continuing belief of otherwise sensible conservatives that the tyrannies of county sheriffs and the state drug laws are somehow less offensive than those of the Department of Agriculture. As my favorite Justice– Hugo Black– once said, "No law means no law". We have far too much of all kinds in this country, and that - not the relative distribution of the presumption of authority - remains the problem.

Gary Rogan writes:

Once again an excellent educational post from Stefan. I just have a quibble with this statement: "As for my head, the only thing that even gives it an occasional ache is the continuing belief of otherwise sensible conservatives that the tyrannies of county sheriffs and the state drug laws are somehow less offensive than those of the Department of Agriculture." Without commenting on the "merits" of either form of tyranny, anything Federal IS more offensive because (a) the Founders' idea was that you could escape a state much more easily than the Federal government if the state becomes offensive, by moving to another state as opposed to leaving the country, thus actually providing feedback to the state that it has gone too far (b) ANY claim by the Federal government of non-enumerated powers is likely un-constitutional and against the spirit of the founding of the country.

Stefan Jovanovich responds:

 I wish what Gary wrote was true. Mobility in 1787 was practically non-existent. People rarely moved between counties, let alone between states. There were more French soldiers at Yorktown than American because the French could move on ships while the Americans had to march. Gary may know the Constitutional debates better than I do; but I can't find a single remarks by any of the Founders regarding the idea that a citizen could somehow escape state tyranny by moving. What the Anti-Federalists disliked most about the Constitution was that it placed real limits on the claims of the states to absolute authority. Patrick Henry is, in that regard, all too typical: brave words about tyranny followed by persistent lobbying that the boundaries of the state of Virginia should extend as far west as the Pacific Ocean. The Founders who voted in favor of the adoption of the Constitution wanted a Union that would guarantee citizens' Federal rights and a supremacy clause that would assure that those rights could not be abolished by State or local action. They wanted the doctrine of "non-enumerated powers" to apply as much to the states as to the Union, and they were so adamant about establishing a balance of authorities precisely because the states had behaved so badly during the Revolution. I should have recommended Calvin H. Johnson's book, Righteous Anger at the Wicked States: The Meaning of the Founders' Constitution before now. It is the best history on the subject, and - like Grant - it remains thoroughly unpopular because it refuses to accept the rightist cant of slave-states rights or the leftist fantasy of inherent Federal moral superiority.

As always, the historical truth struggles to get its boots on.

"A lie can travel halfway round the world while the truth is putting on its boots." - This quote has been attributed to Mark Twain, but Twain stole it ("geniuses steal") from Charles Haddon Spurgeon (1834-92), who said: "A lie will go round the world while truth is pulling its boots on."



The attached plot is the Case-Shiller house price index, Jan 2000- Aug2010. The 20-city US composite is plotted in blue, Los Angeles in yellow, and Washington DC area in red. All three indices are normalized to 100 on Jan 2000, so it is possible to directly compare them.

LA's bubbly party was bigger than DC's, and both were much bigger than the 20 city composite. From 2000 to peak in 2006, LA increased 2.74X and DC 2.51X. To the extent that risk and reward are related, one would anticipate that LA would decline more than DC. Indeed this was the case: From 2006 peak to 2009 trough, LA declined 42% and DC dropped 34%.

Following the same logic, the reflation 2009-present should have been larger for LA than DC, but it is not: LA increased 11% and DC increased 18%.

Rocky Humbert writes: 

Instead of thinking about price as the independent variable, perhaps we should think in terms of supply as an independent variable?

The housing stock of the nation needs to grow– broadly in line with population growth.

Ralph Vince writes:


You are onto an interesting thread of thought.

I have been thinking that "Units per capita/average family size" may be the ONLY thing to eventually pull this market back from the brink. I think the notion of actually owning the dirt — the earth, and all it's rights from your feet to the center of the earth — the unique sovereignity of that, expressed as a certain intrinsic value, has been (as I have said in the past) diminished to a big bag of smoke.

We are property-taxed to death (at least in Ohio and Florida, where I own properties). Essentially, property values need to rise a GEOMETRIC average 5% per year just to keep pace with property. Additionally, the rights to our property have been all but relinquished to the municipalities, the death blow coming in USOC's KELO decision in mid '05 (corresponding most interestingly on the chart of home prices). (This cuts both ways incidentally. In one corruption-prone community I own property in, which abuts a large park system, where there is a 3 1/2 min acre per home, the village council, in an act of abject corruption, granting 130 variances to allow a developer to violate all of these rules and build "cluster housing" abutting the park, I have managed to get those elected officials tossed out and I am managing to garner enough local leverage it appears to take that as-yet undeveloped property via eminent domain).

I am wondering if the only thing to salvage property values is, in fact, an historic mismatch in the ration expressed earlier in this message.

Nigel Davies comments:

I'm totally unconvinced by this line of reasoning. If you look back in history, even one small century, there were often 20 or more people sharing houses which today would be occupied by 4 or less. And this is still the situation in many parts of the world today.

To me this means there is plenty of room for contraction in demand in which case supply stats become meaningless.



Please note that I have no position in gold and am therefore not posting through nervousness or to cheer my position along. So objectively speaking there are a couple of reasons why this can be an interesting moment:

1) People have been SO bullish on gold that it will take them a while to reverse their positions.

2) This kind of overwhelming consensus will draw in many weak bulls who are likely to panic.
3) Such days provide markers for many traders to enter against the prevailing trend.

But don't let a chess player worry you… N



 One of my daughters just got asked by a man to help her carry and buy groceries at a supermarket, and he had a young girl with him in tow or some such. The attempted crime didn't get carried out according to the daughter because "she didn't have enough money or she wanted to go into the grocery store" or some such. I recounted the story of Ted Bundy to her whose Volkswagen that he had lured a hundred college girls he killed into was on display. She asked me what the moral of the story was, and I said, "never trust a man who wants you to go with him to a private place no matter how needy or how much in authority he is." She said "you mean, never trust a policeman or fireman?" (one of the lures that Bundy and many others use and I said something like "yes". I don't think I gave her a good moral for the story. Could you help me say it better?

George Parkanyi writes:

Things aren't always what they seem, and it only takes once to make a fatal mistake. The most successful lurers/killers are the ones that are charming, or blend in with regular jobs/lives, so you can't make assumptions about how a person looks and talks.

Any valid person in authority knows they will run afoul of the law if they insist on being alone with a woman or child (or man)– especially on the strength of that authority. There are usually strict protocols in place (we have them in Scouts– never an adult alone with a child other then their own at any) to prevent potential abuse and also because of the potential liability issues. Call them on it. If someone asks your daughter to go alone with them for any reason– she should by default (politely but firmly) refuse unless someone else can go along as well, preferably another person in authority (a second officer, etc.), or someone she already knows and trusts (say a friend). Though even two or more going off somewhere with a strange person can still be very risky (they could have a weapon or accomplices)– best to avoid any such situation.

Also important to avoid situations/places where there is the risk that if accosted, no one else is around to help.

She should also never volunteer information as to where she lives (especially not take anyone there like the grocery guy), or give out any phone or email numbers. A second wallet with some cash and expired credit cards (with different numbers than the current ones) could also be a useful decoy for getting rid of someone accosting for money (say a drug addict).

Russ Sears writes:

One danger in the solitude of distance running is that you often appear an easy mark for those trolling for trouble. A few rules I follow and tell the kids I've coached are:

1. Run against the traffic. Never approach a car that stops try to stay 10 feet from any door. As others suggest, go the other way running. Pick up the pace. Beware of drivers turning right. Trust your instincts if anything is strange.

2. Do not answer questions. Asking for directions or help find something (kid, dog etc.) do not answer. Generally, there are much better people, people of authority or position to help them. You should not even been approached. Someone approaching a teen for help of any kind should send off alarms. You are much more vulnerable than they are.

3. If they persist–If somebody is near, say a passing car or someone in their yard doing work pretend to know them. Run into places of business. Most kids now always have a cell phone, take it out and dial someone. There is a YouTube video that shows how a cell phone would have ruined the drama of many famous stories: from Romeo and Juliet to Blair Witch Project. Even before it is answered, you can say something like: "some creep is trying to a talk to me." Do not be afraid to escalate into yelling and screaming. 

Jeff Rollert writes:

I can vouch for this, when two guys started hitting each other with tire irons, in the cars directly in front of me in stopped traffic this weekend in LA.

There was no where to go, and being in East LA it was not prudent to get out and run off-freeway.

Very scary. Especially when one went back to car to enter the back seat for something.

Though it scared me quite a bit, the ending was funny, as they got back into their cars and proceeded to try and cut each other off…however, after hitting each others cars with the irons, they were clearly afraid of hitting the cars in the process and damaging them. So it looked more like ballet.

Finally, to explain how LA is the NYC of the 1970's…the guy behind me was honking and screaming at me to move the car towards them. (Note, the convertibles top was down).

Nigel Davies writes:

A fascinating read is Meditations on Violence by Rory Miller, a prison guard used to dealing with violent criminals on a daily basis. He reveals that most ofthe preconceptions people have about violent confrontation are just plain wrong.

For example very few people figure on the 'hormone dump' which takes out both reason and any fine motor skills and can cause the victim to freeze. The attacker meanwhile can have everything planned, giving him a huge psychological advantage.

Miller's top recommendations are as follows, in order of preference:

1) Avoid such situations altogether by being careful.
2) At the first sign of trouble RUN.
3) Hide if possible and running is not an option.
4) Only fight as a very last resort and if no reasonable alternative is available.



 With circulation generally falling, a number of newspapers have been trying to create alternative revenue streams by selling their content online. I was wondering what you all thought of this.

The 'expert' opinion I've seen so far seems to suggest that people are very reluctant to pay for online content unless it is unique and has a high level of perceived value, for example with the Financial Times. But with an ever expanding 'web' out there, is there value in providing a delineated universe in which reasonable quality can be assured?

Stefan Jovanovich writes:

When newspapers were first developed, they were so expensive to produce that only the wealthy could afford them. Ben Franklin, who certainly knew the economics of printing, published almanacs and bibles and primers precisely because they could have extended print runs. The set-up costs– literally setting the type in frames– were the labor expense, not inking and pressing, which could be done by the journeyman. Setting new type every day was simply not profitable. The other virtue of almanacs and primers and bibles was that could reuse the content; the pages left over from one edition could be literally recycled. (If you look at the successive editions of Poor Richard's Almanac you find that Franklin found a way to put "old" pages between new ones.) The steam press and mechanical paper-making changed everything by making it 100 times less expensive to print a page. Adding mechanical compositors made it possible to have a penny press. Pulitzer, like Henry Ford, made his fortune by shaving costs relentlessly; he also had the wit to be the first to cater to the tastes of people who could not yet afford front parlors, those read their "news" while riding the trolley to and from work. The difficulty with selling "online" content is that "the news" is not the product that people have ever paid for; what they have paid for - over the last two centuries - was the paper and ink. The "news" was what they got for free. What the newspaper publishers quickly discovered is that they needed to add "features" - crosswords, sweepstakes, advice columns - if they wanted people to buy more and more papers. The only segment of online publishing that has been consistently profitable on its own has been "feature" publishing - i.e. porn.P.S. People have paid for and continue to pay for "financial news" - horse race odds and results and the stock ticker - but that news was truly timely and was always delivered with a proprietary delivery system. But, even there, the premium paid for pure "news" has shrunk to almost nothing; and the financial publishers seem to be resorting to more and more features courtesy of the info babes. The newspaper chains found themselves doing the same thing 50 years ago; and they soon found themselves making more money from the ads for Mary Tyler Moore local TV news than from their print runs of AP dispatches from Karachi.



 Just get rid of the TV cable all together. TV is evil and rots the minds of children. It glorifies evil, immorality, bad attitude, consumption. I have not had TV for 35 years. Its absence has allowed time for the family, for exercise, for reading.

Throw it out.

Nigel Davies comments:

I'm not convinced that banning either computer games or television is the only way. There are lessons to be learned from television shows just as there are interesting computer games.

My son currently chooses not to watch television, earlier he had a period in which he watched a favourite show at every opportunity. He also plays a computer game called 'Hotel Giant' in which you build hotels and increase profits if you find out what the customers want.

He knows he's free to play shoot 'em up games if that's what he wants, but for some reason he's just not interested. OK, it's probably clear to him that I think this stuff is garbage so it doesn't come with parental approval. But he knows it's not banned either, and maybe that reduces the attraction. 

Jeff Sasmor comments:

We have 7 TVs in our house. Once over 14 I let the kiddies watch whatever they want.

My kids have had their own internet connected computers since they were 6 years old. I don't block anything.We have a PS1 PS2 PS3 Dreamcast Wii Gamecube NES.

Only 1 rule: No TV until homework is done.

Both have A- averages in HS. The older one is in college and is running a 3.8 in freshman year at Barnard, which is not an easy school. Neither is a libertine nor a drug user nor an underage drinker. Unfortunately I was never able to get them interested in Python programming.

Funny thing– with all that availability they don't watch that much TV. Younger one draws all the time (illustrator) and the older one writes all the time (fantasy fiction).

One good thing– they have me in the house every single day (well maybe they don't think that's all that good…).

I think parental encouragement and involvement in a non-shaming fashion is more effective for positive child development than anything else one can do. It worked for my family. I don't believe in any restrictions aside from those necessary for safety reasons.



It's interesting to see how the public gets involved with derivatives trading via such homely apple pie deals as this   (18% if stocks don't go down, money back if they do). Reminds me of a gas company's offer for customers to lock in the price near the peak.



fall of the Berlin wallI think someone will continue professional participation in a game as long as one believes that money can be made. Now there was always cheating in chess tournaments via the throwing of games for prize money and/or title norms, but this didn't stop the better players making money, especially because tournaments had external sponsorship.

But what happened after the Berlin Wall came down is that the bus loads of former Soviets both flooded the market and simultaneously increased the amount of cheating. All but 'elite', non bus-loaded chess events lost their prestige (and thus their external sponsorship) and forced the early retirement of 'professionals' starting with the relatively unsuccessful and gradually working upwards.

Could such a phenomena happen with markets? Very possibly, as once the game starts to get rigged and randomized the weaker pros plus passing wannabes will get driven out, reducing liquidity and making it harder for those who are left to remain. They might not feel the effect at first but the game would become increasingly unplayable.

In this light some early protestations about rigging are sensible as they just might help stop the rot. The creaking gate tends to get oiled and all that.



I think this article entitled "The fall and rise to riches of Edelsten and his young bride" is about as good as it gets. All the pertinent qualities we recently identified as belonging to the malignant hoodoo seem to show up in abundance. Enjoy a good laugh, and mark well,  my friends.

Nigel Davies comments:

Presumably there's a practical application in that if one identifies
companies built by hoodoos they are potential targets for shorting. At
the right time of course



Djokovic servingDouble faulting is one of the most discouraging aspects of tennis. Watching Djokovic double fault the 2nd set away (and to end up losing the match) this morning during a tiebreaker against Berdych in the Wimbledon semifinal match shows that even the number 3 player in the world can feel pressure, fear and nerves on a critical point. Giving away points to an opponent after working hard is extremely aggravating and mentally difficult to overcome.

The tennis serve is very dependent on a good, consistent ball toss–it is so easy to get the wrist involved and throw the toss in all directions and to lower the head (anticipating the return of the serve) during the serve and serve into the net. It's almost better to serve long and try to add more spin than it is to dump a serve into the net. It is also important to think positive thoughts and not tighten up–that little voice in the head can easily lead you to a double fault.

Regular cues and ball bouncing rituals can be helpful.

It's shame though to lose a match due to choking or self-defeating behavior, and you don't see it that much amongst the top pros, but when it happens it is a hard thing to get out of the head. And more particularly when your nickname is "Joker" the press has an easy rhyming headline to use to remind you of your past failures.

Ralph Vince adds: 

McEnroe servingRE: it is also important to think positive thoughts and not tighten up.

This is SO absolutely true, and SO difficult to really define–that being loose, yet in a controlled pace without any real slack on the line. This is vital to performance in anything, be it tennis, fighting…or even thinking through problems. The Old Frenchman would say, "C'est toujours la meme chose," (It's always the same thing).

Think of anytime you've ever choked at anything– the aforementioned mental and physcial state was absent. Think of ANY fight you've ever been in. They always, ALWAYS tighten up, succumbing to fear and adrenaline.

I think pro athletes really understand this, and not just in the individual sports like tennis or golf, but even when these guys are shooting foul shots in basketball. Learning that mental groove is worth more than all the years one can spend in school I think. It's the kind of thing that one learns only by doing it, learned only through the prompting of pain and discomfort until it is found.

Learning things any other way is not really learning. 

Charles Pennington adds:

The serve has got to be the most non-intuitive and difficult-to-learn shot in tennis. Whenever I look at slow motion video showing the trajectory of the racquet, I am amazed that it's possible for a human to do it.

Here's a video of McEnroe serving, showing the fundamental steps–the weight shift, the toss, the swing of the racquet, and the line call argumentation.

Nigel Davies writes:

I wonder if the frequency of this kind of mistake may increase in proportion to a player's muscle mass. The 'nerves' might be a simple chemical equation.



To show how behind I am —– till tonight I had no idea our Edison light bulb will be banned by 2014.

Also did not know there was a 10M prize for the best light bulb.

LED looks the best for now at a projected 40.00 each that will last 10 years.

Wonder if the government will offer ' coupons ' as they sent out for converter TV boxes ?

It seems current light bulbs use 22 pct of current USA electric power.

Comments ?

Nigel Davies comments:

Since January I've been living in a modern low-energy apartment and I've been shocked as to how inexpensive the running costs are compared to the previous one. That's also without considering the 'real' cost of energy, for example the price we pay doesn't include the expense of oil related military operations.

Having said that they way they seem to be going about this just stinks, it looks like they want 'control' at any cost.



Tinsley vs. ChinookI was having a discussion with a colleague on the topic of Chess vs. Checkers. Somewhere I had the impression that Checkers had been "solved" –that it is ultimately an elaborate version of tic-tac-toe, i.e. there is a well-defined correct move to make in every situation. Chess though is different, as I understood it–there is no known correct way of playing in every situation, either because it can't be known in principle or because the computers just haven't found it yet. Can someone set me straight on this topic? (Background: I haven't played chess or checkers in over 30 years, but I am quite good at tic-tac-toe.

Nigel Davies weighs in: 

As I understand it there is no 'solution' as such to either game and that with checkers in particular it is quite easy to make it considerably harder by playing on a larger board and with more pieces (one can also play 'big chess', though this looks somewhat artificial to my eye). With regard to board games being 'computer proof' it's also worth checking out Shogi and (especially) Go where computers are still rather mediocre compared to the best humans.

From the point of view of educating children all of these games are wonderful in that they can teach the young to falsify their own ideas. In order to play 'well' one must find out what's wrong with a move before playing it on the board.

One major consideration in the choice of game might be the number of opponents to be found. In the West at least I believe this is where chess shows to advantage.

Hope this helps. 

Pitt T. Maner III writes:

TinsleyDr. Schaeffer wrote an appreciation of one of the best checker players ever, Marion Tinsley, who actually liked the challenge of facing a computer (nicknamed Chinook).

After Chinook's first game against Tinsley in 1990, we started analyzing the game. Tinsley began recounting the history of the line we played, recalling games he played in the 1940's! The move sequences flowed easily from him without hesitation, sometimes annotated with the name of the opponent, date or place where the game was played! 1947 was as vivid in his memory as if it were only yesterday. The second facet to his play was his incredible sixth sense. A glance at a position was sufficient to tell Tinsley everything he needed to know. For example, in 1990 Chinook was playing Tinsley the 10th game of a 14 game match (won by Tinsley 1-0 with 13 draws). I reached out to play Chinook's 10th move. I no sooner released the piece when Tinsley looked up in surprise and said "You're going to regret that". Being inexperienced in the ways of the great Tinsley, I sat there silently thinking "What do you know? My program is searching 20 moves deep and says it has an advantage". Several moves later, Chinook's assessment dropped to equality. A few moves later, it said Tinsley was better. Later Chinook said it was in trouble. Finally, things became so bad we resigned. In his notes to the game, Tinsley revealed that he had seen to the end of the game and knew he was going to win on move 11, one move after our mistake. Chinook needed to look ahead 60 moves to know that its 10th move was a loser. In my experience with tournament chess and checker players, the sixth sense is experience. It is well-known how intensely Tinsley studied the game, analyzing anything from a Grandmaster game to a game between novices. His uncanny ability to know good from bad and safe from dangerous, is the direct result of all his hard work. Strong chess players have the same ability, but perhaps it is not quite as evident as it was with Tinsley .

Nigel Davies writes:

Seems like we get a whisker away from quite deep philosophical questions. My personal belief is that the goal of 'replacing humanity' in the cause of 'efficiency' is a deeply flawed one. It always feels to me like the attempt to show that computers can 'play' these games much better makes our attempts at self-improvement appear futile, an idea which many people will buy into. Is it too fanciful to suggest that they represent a 'greater goal' of being looked after by machines whilst humans have mindless 'fun'? Nigel Davies

David Hillman writes:

This is not unlike giving up the warm, tactile sensation of the paper page in a book for the slick plastic of a Kindle, or the daily newspaper's beautiful scent of cheap pulp and ink replaced by the netbook's display. The aromas of silicone and polymers do not mix as kindly with the scent of espresso wafting on the morning air. My own livelihood is derived from computer-based industrial productivity and efficiency systems, but my life is kept on a yellow legal pad with a #2 pencil. Balance, always balance. To paraphrase Queen, "we need it all and we need it now." The Deep Blue's, Chinook's, etc. may be wondrous, but there is simply no mineral nor petrochemical-based substitute for the hug of a happy child, for the lap of a caring spouse upon which to lay one's head at the end of a bad day, or for the twinkle in a grand-master's eye across the chessboard when he mates you in 6 moves.

Nigel Davies responds:

I don't think it's the same thing David. An analogy with having a kindle versus a book would be to play chess against a human via your PC. Having computers do the playing and trying to demonstrate their 'superiority' is more like having them write the books, and purportedly do it more efficiently than humans; fewer words for the same meaning perhaps, 'War and Peace' reduced to 10 pages.

Chris Tucker agrees:

I agree with you completely Alan, my point is just that programmers are not out to replace us completely (yet, anyway), but they are out to codify decision making. Games are a good place to do this because the rules and possible moves are very limited, even though the number of possible outcomes can be astronomical. The arena is structured and they can test and validate their ideas within this framework. The idea of game playing is much deeper, philosophically, (as Nigel suggests) than most care to admit. I will leave that bit for you two to explore. Machines that can replace the humanity of squaring off with an opponent do not exist, there are simply too many levels of interaction there. 

Nigel Davies replies:

Chris, there is no decision making in the programs or any attempt to replicate human thinking, they simply use brute force to analyze all the possibilities (with chess slapping in a primitive evaluation function) and the mathematical limitations of the games enable them to get away with it and 'win'. Perhaps when they started out the intention was to create 'artificial intelligence', but I don't see that this claim can be maintained given the route they have taken. Looks like an ego driven attempt to 'beat mankind' of the type which enables a car to go quicker than someone on two legs. 

Dave Bacon addresses the original question:

I believe Checkers on a standard sized board has indeed been solved. The reference is Science, Sept. 2007, Vol. 317. no. 5844, pp. 1518 - 1522.

“Checkers Is Solved” Jonathan Schaeffer, Neil Burch, Yngvi Björnsson, Akihiro Kishimoto, Martin Müller, Robert Lake, Paul Lu, Steve Sutphen

The game of checkers has roughly 500 billion billion possible positions (5 x 10^20). The task of solving the game, determining the final result in a game with no mistakes made by either player, is daunting. Since 1989, almost continuously, dozens of computers have been working on solving checkers, applying state-of-the-art artificial intelligence techniques to the proving process. This paper announces that checkers is now solved: Perfect play by both sides leads to a draw. This is the most challenging popular game to be solved to date, roughly one million times as complex as Connect Four. Artificial intelligence technology has been used to generate strong heuristic-based game-playing programs, such as Deep Blue for chess. Solving a game takes this to the next level by replacing the heuristics with perfection.



The first chess computer, 1960There is a vast literature supporting the use of mechanistic decision in repetitive situations, [instead of] over relying on human expertise. Forgetting about accuracy for a moment, which is key, humans are quite inconsistent in the way they use information. Show an expert the same fact set on repeated occasions and the conclusions only correlate at about 0.50. In other words, the facts only account for about 25% of the variation in the expert’s final conclusion. This suggest that the way information is being weighted from instance to instance is inconsistent or the expert is considering information outside of the fact set. When it comes to accuracy the decision algos do better, overall.

Rich Bubb adds:

Here is an interesting example. Soon all of you will be replaced by machines [LOL]:

[An automated investing] system was developed by Robert P. Schumaker of Iona College in New Rochelle and and Hsinchun Chen of the University of Arizona, and was first described in a paper published early this year.

It's called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes" and it never holds a stock for longer."

Source: MIT Technology Review Blog

Nigel Davies writes:

That's a pretty sad comment on fund management standards. Humans have put up one hell of a fight against computers on the chess board using raw (unaided) brain power and still beat the best machines if they're armed with an ordinary PC and have a longer time limit. And that's to say nothing of the drubbing that Go players have given computers, even giving so far as to give them odds.



The Saratoga Tree NurseryI spent the weekend planting 150 baby trees on our property.

The trees of Westchester and Fairfield County suffered mightily during the spring storms, and many of our wealthy neighbors purchased large shrubs and full-grown trees to mitigate the aesthetic damage. One neighbor's estate now looks like a Christmas Tree farm.

In contrast, I planted dozens of random six-to-nine inch tall native species seedlings — and for the price of two Home Depot shrubs, I left a bequest to future generations. Even if there is only a 10% survival rate, it will provide an awesome return-on-investment.

The NY State Department of Environmental Conservation runs the Saratoga Tree Nursery, and since 1902 has produced and sold more than 1.6 billion seedlings at a low purchase price.

Surprisingly, NY State says that the major cause of seedling mortality isn't wildlife or competing plant species. It's lawn mowers.

For more information about this excellent resource, go here.

Other states probably have similar programs.

Scott Brooks comments:

 Although I'm not expert, here are a few tips from a guy who's planted more than a few trees in my day.

I don't know what it's called, but it looks like an inverted cereal bowl that you put over your tree and slide it to the ground (bowl side down). This keeps sunlight from hitting the ground under the "bowl" and thus keeps weeds and grass from growing right around the base of the tree and competing with the tree for water, nutrients and sunlight.

Use a "tree tube" (that's what I call the) and put them around the tree to protect them from wildlife eating them. It also makes it easy for the person on the lawnmower to see them. It also doesn't hurt to tie a piece of surveyors tape to the top of the tree to make them easier to see.

Fertilize the hole you are going to put the tree in, then fertilize around the drip line, but don't over fertilize (NB: small seedlings won't have a "drip line" yet, but when they do, fertilize around the drip once or twice a year). Then dump a bucket of water on it. If it's been particularly dry, feel free to water the seedlings.

Don't be shy about weed whacking around them to knock down any weeds or grass.

Rocky Humbert adds:

If you have a bad back, they sell a device that allows arborists and forest rangers to plant seedlings while fully erect. And if you are planting thousands, you can rent a mechanical planter.

Nigel Davies comments:

Yuk. 450 minutes on one's knees is precisely 30 minutes worse than being a pawn down for seven hours…

Russ Sears writes:

Indiana has a similar program. When each daughter was young I planted several hundred trees– 700 trees in all on our 2 acres. Walnut and oak mostly. Pine trees were planted between rows of hardwood to make them grow. By the time we sold the house the hardwoods were just beginning to over take the smaller pines. The kids loved marking time by the size of the trees as both the trees and they grew the 12 years we lived there. It also turned out to be profitable as the buyer said they wanted the house for the trees. Plus, on visiting an old neighbor, each neighbor bought several large trees from them. A super Walmart moved behind them bringing with it multiple fast food joints, etc. This ruined the lovely view, rustic trails and the low traffic runners love, which were the things that made me buy the place to begin with. It left an island of nature that hides the modern development. 



 One is astonished at how far the subject of position sizing has come since Robert Bacon in 1940 when he suggested 2% of your money on each bet, then a buck on the races so you could lose 50 in a row before going under.

How about an approach where position size was a variable that you put in your statistical return and reward space to start with, then examine the distribution of returns with various positions sizes and determine how your utility fits in with the distribution.

For example, today a 20 day high of 230, indeed a 1½ year high. What is the distribution of the six such?  Max 4.8, min -5, moves to relevant endpoint 2, 5, 2, 2, 1, 5, -2, 3. No trade from Bacon. Wait for overlay. Pittsburgh Phil in the background.

Phil McDonnell writes:

The hard truth, to me, is that it is all position sizing. –Ralph Vince

I agree with this only up to a point. In order to have a winning strategy one must have an edge in a statistical sense. You cannot win with a losing system. One needs both a winning system with an edge and a solid money management system. Neither one alone is sufficient.

After one finds a winning system then you must also have a money management system that does not expose you to ruinous losses. If you graph the expected amount of money you make at various position sizes for any winning system you will find that it looks like a mountain. The peak of the mountain occurs at precisely the positions size Ralph calls optimal f. But if you also look at a chart of risk (stdev) you find it is a monotoncally rising function of position size. Thus as you continue past the optimal f point you are giving back return but still increasing risk. It is the worst of both worlds. If you go far enough past it you can actually wind up losing money even with an overall winning system. That is why I prefer to call the optimal f point the point of maximal investment return.

kahneman receiving nobel prizeWith respect to Vic's comment about utility, there is much merit to this approach. None of us truly knows our utility function and if you believe Kahneman and Tversky it is probably irrational anyway. So then the next best thing is to construct a rational function mathematically from some logical first principles. The three most obvious choices are Sharpe ratio, log, and my favorite is log log Sharpe ratio. Except for the simple log function, one invariably finds that using these utility functions one chooses a point on the mountain graph somewhat to the left of the optimal f peak. So in that sense optimal f is really only 'optimal' for the case of maximizing compounded portfolio return but is sub-optimal and dangerously past the optimal point for maximizing any utility which explicitly takes risk into account.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Ralph Vince adds:

I agree with most of what you say here. Like the old Frenchman used to say, "Most people don't know what makes them tick; they only know that they tick."

Most people do not really know what they are in the markets for — and I think there are very many different and good reasons for being in the markets aside from mere growth maximization. But most don't know what they are here for.

I think until someone can answer that they're probably better off not being in this arena. But I no longer think one needs a winning strategy, and I beg to differ with the notion that you must have a positive expectation (and, this too further indicates that timing and selection are subordinate to sizing). Ultimately, you are in this for a finite number of holding periods or trades (call this T) , and given that you have control over your quantity, you seek to come out at T (or before, if you have achieved the objective of your criteria) with the objective of your criteria.

Again, and I will use this for illustration of the idea — if I could do a full martingale on my capital, and I had unlimited capital, and my goal was to accumulate, say, X……

I could then do a full martingale on a losing system, and when X was achieved (or at necessarily time T) leave the game.

I know for years I too bought into the idea that you have to have a winning system. But I am seeing guys who have specified their criteria well, and are getting astounding results, and are trading approaches that are, at best, feeble. 

Ralph Vince is the author of The Leverage Space Trading Model, Wiley, 2009

Phil McDonnell replies:

I would love to see an example of a system that had a negative expectation but could somehow be turned into a positive expectation through money management. The martingale example is a system that exchanges a high probability of winning a small amount for the small probability of losing a large amount.

Examples of such 'systems' with skewed distributions would include:

  1. Selling out of the money options.
  2. Setting a profit target of $1 with a stop of a $10 loss.

Until I see one I shall remain skeptical that one can reliably expect to profit from a losing system simply through money management.

Rocky Humbert:

As a philosophical matter, I question whether a system can truly have a negative expectation. Because if you take a system that supposedly has a negative expectation and simply do the exact opposite, you should have a system with a positive expectation. I am skeptical that any market participant believes that his approach has a negative expectation.

If you have ever tried to play checkers to lose (instead of win), you'll see just how difficult this can be.

(Note that I am excluding transaction costs from this discussion. But there should be no a priori (efficient market) reason to believe that always buying out of the money options should have a better result than always selling out of the money options– unless there is a systematic mispricing.)

Steve Ellison comments:

crapsAny casino game is a system with a negative expectation for the player (except a blackjack card counter). In craps, one can bet against the shooter, but the expectation is still negative. The only way to take the other side is to be the house. 

George Parkanyi writes:

In my REAP system (Relational Equity Allocation Program), I made the position size a function of the relative separation ( % move of X minus the %move of Y determined the % of position X to sell to fund the purchase of position Y) between two securities made over time. You can re-allocate based on a specific net separation (e.g. 30%) or re-allocate at specific time periods come what may. This has a positive expectation over long periods, because there is dollar-cost averaging dynamic involved - a more aggressive version because fewer shares are sold of the relatively higher security, and more shares bought of the relatively lower security, and the wider the separation the larger the re-allocation size. The compounding over time depends on the volatility (and therefore degree of divergence and funds transfer) between the matched securities.

Trade sizing can also be used for money management in trend following. The simple principle of scaling into a position as it rises keeps your risk relatively low on initial entry, and there is a cushion of profit to fund the risk of subsequent higher-up scaling purchases. Here again, you can optimize by how high you go before adding, and what tranche sizes you add at each level. The trade-off is that you limit your profit potential by scaling, but your stop-outs are cheaper, and waiting to add provides confirmation of the trend.

I currently am using a 40-30-30 scaling sequence, using a specific setup pattern rather than a fixed % rise (e.g. 0%, 10%, 20%). You could use a relatively wide stop on the first tranche, or really keep your costs down and use a very tight stop that allows several inexpensive stop-outs before you "latch". The latter is a better way to go I think if you are trading breakouts and strength patterns. A good break-out doesn't look back, so your tight stop doesn't factor in. If you have to stop out 3 to 4 times before you catch it, you can still keep your misfire costs low.

Rocky Humbert:

Fair point. I was referring to the financial markets (and not casinos,) but you can indeed buy and hold the shares of publicly traded casino companies and you are taking the other (positive expected) side.

Turning a system upside down highlights an additional phenomenon: path dependency can determine whether one is a trading "genius" or "moron."

Nigel Davies comments:

Fascinating discussion.

If I might offer my two cents I've found that in my field there are an immense number of practical difficulties in bringing a nice piece of theory to the board. From my amateur perspective I see many issues with regards to the subject under discussion:

a) A maximum loss size implies that you have a clearly defined exit point, i.e you are trading with stops of some kind and these can nonetheless leave you a winning system.

b) Assuming you have your exit point, how realistic is it that this will be achieved (slippage etc).

c) Does assigning all trades the same position size represent maximum efficiency? I suggest that some are much better than others and should therefore be weighted more heavily.

I'm sure that readers of this site can think of many more issues such as these. This in turn makes me wonder about the utility of trying to apply very precise mathematics to practical and very messy issues. Surely it should come with a good sized dollop of common sense and flexibility in which good lab experiments are regarded as mission statements rather than straight jacket rules.

Of course doing this is an art in itself which will extends into all sorts of psychological nuances. If anyone is unable to do this they should be looking to work on themselves rather than 'the system'. Discovering the reasons why people can't operate effectively under pressure is very valuable, both in the markets and in life.

Craig Mee responds:

Fair call, Nigel, though the one thing I would have to agree about on the surface but disagree on is "I suggest that some are much better than others and should therefore be weighted more heavily."

It had been my humble experience that the trades I thought were crackers ended up as duds, and those I thought were tradable, but just above the criteria, turned out to be 4-10 baggers. Setting the same cash risk, at the start was imperative across the board.

Nigel Davies writes:

 Well, yes, that can be a tricky one. But if one's assessment of bullitude/bearitude is unreliable vis a vis degree, what makes you so sure that they're not completely the wrong way round!? It could be that 'sure thing' trades lower one's vigilance in which case we're back to the human factor. Anyhow, now I'm more awake I can think of some other flies in the ointment in this position sizing debate. What about:

a) The good part time trader with a day job who wants to build up capital. Perhaps he should he push the boat out more at first so as to get a big enough account to go professional.

b) The improving trader; shouldn't he trade small size whilst learning?

c) The successful professional trader who wants to protect capital. Shouldn't he gradually reduce size rather than have his entire wealth and livelihood on the line.

Don't get me wrong, I think that an understanding of position size risks is essential. But there's a lot more to this than just numbers.



Unemployment Map of U.S-2007 TO 2010

Scary and Real!

Please review this Unemployment map of the United States. This is hard to believe, but TRUE! I had to review this map a couple of times to grasp the enormity of it. Watch the map automatically update from 2007 to 2010… WOW!

Nigel Davies comments:

The scary part may be the symbolic use of colors. Having black (death, nothingness, annihilation) for anything from 10-100% seems almost deliberately misleading and the map looks like a rotting piece of meat. There's probably a similar effect in chess, with players playing White often tending towards optimism whilst Black positions can have a look of doom about them. And you can deliberately magnify the effect by playing cramped looking defenses and even placing the pieces slightly towards the back of the squares. BTW, you get a similar psychological effect with candlesticks, the mind being subtly influenced to see down days (black candles) as being doom-laden whilst white ones appear to offer hope. A good practice may be to use green for down and a neutral gray for up, and maybe do something similar with one's Bollinger bands (black as the upper band, pink or something for the lower one). 

John Lamberg writes:

Many years ago, a wise professor taught me the visual power of choice of scale when preparing a X versus Y graph. 




The help laughs behind their backs,
As the Mercedes, Lincoln and Catties.
First fill the handicap spots..
Until the whole lot is full
Of Gray and Bald headed Early-Birds.

They stroll, walk and hobble,
To the supper special for the day:

Desserts puffed with air
And weak artificial flavor
Vegetables steamed to oblivion;
With variety of syrupy fruits;
All with slabs of meat
Served with pomp and detached jazz

The waiters know them by name
And the story behind each one
A doctor, a lawyer, a professor or two

Little did they know,
The devil's trade they daily made
Those toiling years ago.

To miss the daily diligence of running, hiking or seeking:
The wild beauty of the bobcat,
Attacking the spotted doe.

They would be left with black velvet deer
And serene glowing trails on canvas.
As their arteries clogged 
As their blood turned to medicated sludge.

But then the conversation turns sadder
As they talk of greater minds, lovers or brothers;
Gone or in the home,
From dementia, strokes or fatty cancers.

The devil smiles as they say grace,
And thankfully say they are the lucky ones.

Rocky Humbert comments:

The studies which I've seen suggest that running 30 minutes a day will add 3.5 to 3.7 years to one's life. However, if one is awake only 16 hours/day, then that 30 minutes of running consumes 3% of one's life for an increase of life expectancy of approximately 4.7%. While this gives no value to the increase in general well-being from regular exercise, it's hardly grounds for the help to be laughing.

In contrast, a talented attorney can spend those 30 minutes billing at $1,200 per hour, and use the income to ensure access to a private room at the Cleveland Clinic for a quadruple bypass, valve replacement and experimental treatment for Type II Diabetes.

One wonders whether Jim Fixx has any regrets?

Kim Zussman adds:

 Which begs for a present-value calculation for doctors who run 30 minutes a day from $1200/hr lawyers.

Nigel Davies writes:

The time could be used to listen to talking books and the like. Plus it would be interesting to see if cycling on an exercise bike would produce similar results in which case one's options are much more varied (eg trading and cycling).

Of course the other thing they didn't measure is quality of life. Not much fun having a blonde on one's knee whilst struggling for breath and wondering if one will survive the experience.



 Here is an interesting paper by Swedish researchers Christer Gerdes and Patrik Gransmark on how male chess players are more likely to take risky moves, to their detriment.

Nigel Davies comments:

Long ago I realized that the best procedure against most risk averse females was to riskily snatch a hot pawn or damage their structure in a way that would force them to attack.

But the researchers do not appear to have a category for my behavior…

Needless to say I wouldn't do it against Judit.



Raising Your Child to be a Champion in Athletics, Arts, and Academics
by Wayne Bryan and Woody Woodburn has many ideas about how to train that might be useful in markets and in life. They believe the main thing is to have fun. They suggest constant reinforcement with trophies, medals, and small goals. They recommend that you make the one thing you wish to excel at a passion, and that it be tempered with only one other passion. They schedule every second of every day, and never leave their kids alone in the house. They recommend playing with kids, and constant tournaments. They suggest going to events like high school and college games so that the kids can enjoy the feel of college and kids that are not that far removed from them. They suggest the importance of thanking all involved in any contest including the fellow competitors and the tournament organizers. Of course, they have taken their kids out of tournaments when they didn't behave as did Kramer and Borg. They of course totally ban all TV and computer games. They have a very successful program in tennis that they run, and their kids are the best doubles team of all time. (Both were national singles winners or close to it, and were called champ by their coach at Stanford). Do you feel that this has applicability to improving in our fields?

Pitt T. Maner III writes:

The Bryan TwinsThe Bryan twins were on 60 Minutes last Sunday.

Several things stood out in the interview. Lots of positives but some potential negatives. One of the brothers gave up a successful singles career in order to play doubles with his twin brother–always a possibility for future regret even though they are a great doubles team now. Other thing was the video game restriction–what they were denied in their youth they do now. So it would seem that too much discipline with children could lead them to rebel later in life in opposite directions.

There is always the survivorship argument that for all these successful kids there are a bunch of kids who become burned out on tennis, academics, and life in general. My guess is that one method fits all is not always going to work and parents would need to be very attentive to individual differences amongst their children. Too much praise (particularly if overdone and not genuine) and trophy hunting does not sound like a good thing either. Perhaps a need for balance is true for market participants also.

Rocky Humbert comments:

Waitzkin vs KasparovThe back cover of the book reads, "Byran has distilled his proven formula for success into a unique book that shows parents how to help their kids become champions in athletics, the arts, academics– and just about anything else they undertake."

A proven formula? I don't think so. (Or at least I hope not.) But early in the book the author's define "champion" in a broader way. They don't define it as being the best doubles tennis player of all time, graduating Harvard in two years, or having a ten-digit net worth.From the book: "The goal should be to raise a champion under a broader definition…. Being a champion means being fulfilled. Peace of mind and self-satisfaction."The authors continue, "There are endless definitions of a champion."And with that last sentence, I wholeheartedly agree. That recognition is applicable to every facet of our lives. 

T.K Marks:

In a recent working paper by Andrew Lo, "Is It Real, or Is It Randomized?: A Financial Turing Test", his colleagues and he conclude by vowing to consider in the future the null hypothesis of the video games are bad theory.

"…More generally, human intelligence is intertwined with pattern recognition and prediction (Hawkins, 2004), and financial pattern recognition is just one of many domains in which we excel. Our simple experimental framework suggests the possibility of developing human/computer interfaces that allow us to translate certain human abilities into other domains and functional specifications. For example, with the proper interface, it may be possible to translate the hand-eye coordination of highly skilled video-gamers to completely unrelated pattern-recognition and prediction problems such as weather forecasting or financial trading. We hope to explore such interfaces in future research…"

Regarding Professor Lo's financial variation on the Turing Test and proposed consideration of the pattern recognition abilities of video gamers, if a Bletchley Park were to have to happen today, the pattern developing and recognition talents of people who write and play at a very high level some of the more sophisticated versions of those games would undoubtedly be tapped into.

Alongside Alan Turing at Bletchley Park, in addition to the usual scientific suspects whose analytical skills were asked to break the German codes (e.g., mathematicians, logicians, physicists, etc.), they also had a host of Egyptologists, chess players, even a poet, anybody and everybody whose pattern recognition skill set would better lend itself to deconstructing a very complicated puzzle.

Nigel Davies:

The mix of chess players and mathematicians at Bletchley was interesting. Coincidentally I stumbled across this article today which differentiated the intelligence of mathematicians from that of chess players:

"Everybody was fairly impressed by this quick and crafty answer and the conversation moved on. The story illustrates something important about the nature of the chess mind– how good it is at short cuts (no pun intended) and tricky ways round things. Mathematicians are usually less devious in their thinking– it is important to find direct ways to prove things." If this is correct, which is the more valuable form of intelligence for markets? 

On another note, I would add that in our quest for 'love', 'approval' etc we can look for external approval within a particular sphere of excellence. Without reading the book (and I comment reluctantly without having done so) it looks to me like Wayne Bryan has found ways to link this ever more strongly to external performance. Is he to be congratulated for his efforts, as a parent?I am haunted by images of champions who go totally off the rails as they struggle with the ghosts of their childhood. In my own sphere I've met too many pushy parents making 'love' conditional on performance to join in the applause. Just this last week a kid in my chess class threw a wobbly and had a nose bleed when I enforced the touch move rule on him, costing him a rook. Needless to say his mum insists on him being the best at everything… 



John SteinbeckJohn Steinbeck's East of Eden, which he considered his best novel and is autobiographical at age 43, has much wisdom about the market and life in it. I like the passages where he talks about fattening up the cow before the slaughter the way the father fattened him before having him inducted into the army after a beating by the Cain brother, and the part about his father missing Cain with a shot gun to get revenge thereby changing his life, which Steinbeck extends to say that every little thing you do like stepping on a twig affects everything else in your life, and also the part about 10 year cycles of rain in Salinas County which everyone forgets about selling out at the bottom or living high on the hog during the rain. Totally brilliant and O' Brian-esque albeit a little forced relative to O' Brian.

Kim Zussman adds:

Or when the father came up with the idea of packing lettuce in ice for shipment, only to receive news that the ice melted in the train and the lettuce spoiled anyway. Though he was financially ruined, he optimistically said

"One day someone will develop a way to ship refrigerated produce. It just won't be me."

Later the black sheep son made a fortune speculating on futures as war broke out in Europe. Thinking that repaying his father's debt would redeem him, he was disappointed when father regarded this as blood money which must be returned.

Stefan Jovanovich comments:

East of Eden is that rarest of all things– a great, great novel and movie both. As Kim knows, the father's own fortune came from his selective accountings for the monies collected by his Grand Army of the Republic veterans group (the American Legion, VFW and SEIU of its day which expanded the pension program for Union veterans–no Rebels– from the combat veterans to the children of the clerks who never left their desks). Steinbeck also adds the irony of the father, whose veteran constituents had all been volunteers, serving on the draft board and then finding his son's profits from selling to the British purchasing agent somehow tainted. 

Gregory van Kipnis adds:

But the greatest insight to me came from the discourse over the biblical debate about Cain and Abel. Was Cain fated to kill his brother "Thou shalt" or did he have choice: "Thou mayest." The search for a correct translation of the key Aramaic word 'timshel' led to the Chinese immigrant scholars. After much study they ultimately declared that 'timshel' meant that Cain had choice. 

Nigel Davies comments:

This is quite a widespread idea, but an alternative way of looking at this may be that the 'stepping on twigs' is relevant only in that it can reflect attitudes (personality traits) that affect broader and more vital issues. On its own it is irrelevant. 



curlingWatching curling as I type, the announcer just likened curling to Chess on ice and spoke of Pawns etc. It would be nice in competitive Chess or Checkers to have the two "sweepers" ahead of you on the board to make way for your advancing pieces so one can make a 'clean sweep'. Is there also be an application to the Market?

Nigel Davies writes:

On hearing a commentator describe snooker as chess with balls one of my more mathematically inclined colleagues produced the following:

snooker = chess + balls
chess = snooker - balls (subtracting balls from both sides)

In the same spirit may I offer the following:

curling = chess on ice
chess = curling off ice

But I guess that board game players should take these comparisons as a compliment…



I discovered that the best religion for chess players/traders (and others) is actually taoism because the exercise systems they developed help solve the problems that arose with the human nervous system when we started moving around on two legs. Unfortunately much 'feudalism of the mind' is now intertwined with the culture of these arts, but the kernel [of taoism] represents a solution to many of the problems of the human condition.



What is the equivalent of an open versus a closed game in market trading, and under what conditions is each better or worse?

Nigel Davies writes:

An open game is a volatile one in which the ball comes onto the bat very fast.

Laurence Glazier comments:

Perhaps it can be quantified by the amount of risk the trader is taking, as the greater number of possibilities in an open game steer the players closer to the cliff edge. But there the analogy finishes, as in chess the reward/risk is ultimately for the same prize, whereas in trading, more risk increases the stake.



 Checklists have been shown to reduce errors, improve accuracy, and increase profits in many fields. Most recently, a study in the New England Journal by Atul Gawande shows that use of a 19 point check by surgeons could reduce deaths by 30% and save billions. Such simple things as knowing all the names of your colleagues and being sure that an adequate supply of blood and respiratory equipment is available are useful.

When it was suggested to me that a checklist for my own trading might be useful, I originally had the same reaction as the doctors. "I've flown with the eagles, climbed the highest mountain, captured the mountain lion, been a member of all the exchanges, played 12,000 refereed matches, went to Harvard." But then I read the reaction of the Drs. "I'm from Harvard. I don't need such a list. But if I was operated on, I'd like such a list."

Here's a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you'll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn't enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker?

11. If a trade is based on information, was the information known to others before you?

12. Was there enough time for the market to adjust to that information?

13. What's your entry and exit point?

14. Are you going to use market, limit or stop orders?

15. If you don't get a fill how far will you go? And what is your quantity if you get filled on all your limits?

16. How much vig will you be paying if you use market or limit orders and how does that affect the workouts you did knowing that if you use stops you are likely to get the worst price of the day and all your workouts will be worthless because they didn't take into account the changing price action when you use stops, to say nothing of everchanging cycles?

17. Are you sure your equipment is as good and as fast as the big firms that take out 100 million a day with equipment that takes into account the difference between being 100 yards away from an exchange and the time it takes the speed of light to reach you?

18. Are you going to exit at a time or based on a goal? And did you take into account what Jack Aubrey always did which is to have an escape route in case all else fails?

19. What important announcements are scheduled? and how does this affect when and what kind of order to use? For example, a limit before employment is likely to be down a percent or two in a second. Or else you won't get filled and you'll be chasing it all day.

20. Did you test how to change your size and types of orders based on announcements?

21. What's the money management on this trade?

22. Are you in over your head?

23. Did you consider the changing margin requirements when the market gets testy or the rules committee with a position against you increases the margins against you?

24. How will a decline in price affect your margin and did you take into account what will happen when you get stopped out because of margin?

25. What will happen if you need some money for living expense or family matters during the trade? Or if you have to buy a house or lend money to a friend?

During and After the Trade

1. What's your game plan if it goes against you and threatens your survival?

2. Will you be able to get out? Did you take that into account in your workout?

3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?

4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?

5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?

6. How will unexpected cardinal events affect you like the "regrettably," or the pre-annnouncement of something you expected for the next open? And what happens if you're trading an individual stock and the market goes up or down a few percent during the day, or what's the impact of a related move in oil or interest rates?

7. Are you sure that you have to monitor the trade during the day? If you're using stops, then you probably don't have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you're using 10% of your capital on a trade, they you'll have to monitor it for survival. But, but, but. Are you sure you won't be called away by phone calls, or the others?

8. Are you at equilibrium in your personal life? You're not as talented as Tiger Woods, and you probably won't be able to handle distressed calls for money or leaks on the home front. Are you sure that if you're losing you won't get hit on the head with a 7-iron, or berated until you have to give up at the worst possible time?

9. After the trade did you learn anything from the trade?

10. Are you organized sufficiently to have a record of all your trades for your accounting and learning?

11. Should you modify your existing systems based on it?

12. How does recency and frequency and value affect your future?

13. Did you fit your after activities to your mojo?

14. If you made a good profit, did you take some capital out of the fray for a rainy day?

15. Have you learned to say "fair" whenevever anyone asks you how you're doing and are you sure that you don't spend a fortune after a good trade, and dissipate your profits with non-economic activities?

16. Is there a better use for your time than monitoring the ticks or the market every minute of the day if you do, and if you don't, do those who do so and have much faster and better equipment than you have an insurmountable advantage against you?

Well, specs, that's what I come up with off the top. How would you improve or augment it?

Nick White comments:

If a position begins moving against beyond what was anticipated in the workout can one, through either contacts or acquired counting skills, figure out as fast as possible why the move against is occurring? With that information, can one then discern whether or not such a move needs to be heeded, faded, or left alone?

What legitimate information sources can one leverage to better understand a particular trade? A buddy who is a floor trader, a mentor, a high ranking friend of a friend in a central bank?

Are one's current skills commensurate with one's trading goals and ideas? Perhaps, more importantly, are one's trading skills of the same league and caliber as those one is competing gainst in a particular market? If not, surely best to wait and keep capital safe until one is sure of one's edge. This strongly accords with Chair's admonition to never get in over one's head, and to not spend inordinate amounts of time watching each tick when that time could be more profitably invested in training and developing new and existing skills — counting, programming, etc.

Make the strongest effort possible to find out whether the tail wags the dog in a particular instrument that you're trading. If it turns out that it does, does it happen with significance at a particular time, such as expiry? Or after a particular event? Can it be exploited after costs or is it better to fade it after the fact?

If one asks these questions and takes note of them in the essential lab notebook that ought to be at one's fingertips during all trading and researching activities, have those questions subsequently been answered by oneself? I have found this to be the most fertile soil for developing new insights and ideas. If you observe it, note it and question it — hypothesize about it and answer it.

Alston Mabry comments:

Here's one: Don't fool/confuse/tire yourself by making your execution more precise than your analysis. If your target is 2% within the next five trading days, then chasing two bps on the entry isn't going to make or break the trade.

Easan Katir adds:

  1. If you trade odd hours, get enough sleep and appropriate caffeine dosage.
  2. One well-known S&P pit trader advised two bowel movements in the morning before setting foot on the floor.
  3. Start the day with a centering routine — affirmations and goals. Remind oneself of one's larger purpose.
  4. List important times and dates on an online calendar with appropriate alerts: government numbers, earnings, ex-dividend dates.
  5. Rehearse successful behaviors and outcomes. And disaster recovery.
  6. Minimize other life stressors: long commutes, family arguments, risky vices, debt.
  7. Test backup equipment and systems regularly. I test my diesel backup power generator weekly.

Victor Niederhoffer responds:

I would add a small point. Trading foreign markets always seems much more difficult than domestic ones. For one, you never know what the important announcements are. For two, you get killed on the spread on your foreign exchange prices. For three, it seems to be 100 times more time-consuming to get into the queue than even the 1/100 of a second that's enough to give the domestic high frequency traders an insurmountable edge on you. For four, you have to go without sleep for at least one night, and then on the second night when you can't stay up the required 48 hours without sleep the move you expected and closed out is sure to happen.

Alan Millhone writes:

Checker master Tom Wiswell said to always keep the draw (escape) in sight.

Scott Brooks adds:

I have to disagree with Easan on the caffeine. I know there are many people that have to have their morning cup(s) of coffee to get their day going, and without it, don't feel/function right.

I do not want to go through life being so dependent on something that I have to have it to make myself feel right, let alone function right. I know this will be anathema to most (everyone?) that reads this, but I have to say it.

When I removed the caffeine addiction from my life (and don't fool yourself, it is an addiction…..if you have to have it everyday and then quit it, you will go through withdrawals……it is an addiction), my life changed so much for the better. I can think clearly. I can process information more quickly, and I can see solutions with greater clarity.

And your sleep will improve immensely. I suffered from severe insomnia for years. Kicking caffeine out of my life has lead to my being able to fall asleep, usually within minutes and being able to get up earlier and feel more refreshed!

You will find a level of "mental processing" that you never thought possible when you replace coffee and caffeine with purified water (I drink around a gallon a day) and a glass or two day of the organic juice of your choice.

But be prepared, you will likely have around two weeks of headaches when you go through caffeine withdrawals (you know, from the caffeine that you're not addicted too).

Nick White agrees:

Ditching caffeine is a good move. Best to save it for when may really need it on an overnight (or two) session. As mentioned in the past, Dr. Shinya is fervently anti-caffeine. Like many others, I found Dr. Shinya's principles promoted many positive health benefits for my wife and me.

On that note, i find that the Shinya nutritional principles — when moderated by the ideas behind the paleo diet — are a real winner; the increased "good" protein from the Paleo program does much to mitigate weight gain from increased carbohydrate consumption when kicking off on the Shinya program. There is a Paleo program for those involved in elite endurance sports.

George Parkanyi writes:

On any project or major activity, the first question I ask is how much time I have. That frames everything that is to come.

The very next thing is to build a contact list with names, phone numbers (backup phone numbers) and email addresses (and account numbers and passwords). This is also true in Scouts, where we need to have that information at our fingertips for safety reasons — in fact for every camp we have to draft an emergency plan — police, hospitals, parents, primary first aid responsibilities, etc. In a trading operation this is critical. If you have key support resources who have to act on your behalf at a moment's notice, then they need to be available, you need to able to access them, and if not, there must be a ready backup contact and plan B, even C. Chair's point about having a pen available can even be a critical detail — what if, in the heat of battle, you have to write down, say, a wire transfer number? In my case, reading glasses would be another.

Kim Zussman comments:

As a periodontal surgeon, I have found it much easier to stay composed and rational during difficult surgery than unruly trades. Chair's excellent list hints at why, in the form of the question "how do you know?".

Surgical complications follow rules of biology, and mistakes usually come when overlooking something or miscalculating the compounded risk of several factors. One can and should practice with a large margin of safety, which in almost every case is easy to determine. Biology is almost immutable, but markets morph wildly in real-time. It is very difficult to stick with a position if you are honest about your cluelessness and unwilling to go down with the ship. When the trade goes bad:

1. What was your hypothesis? How many others had your idea too? Or the opposite one? Are they right? What do they know that you don't? What is the source of your confidence that you can out-smart (or out-run) the million-mind-march?

2. Did you test properly beforehand? Did you miss something; a signal from another market, a subtle backdrop to your traded market? What is the chance this time is different, and should this doubt change your mental stop?

3. How heavily is your market being manipulated? By government? Big banks? Goldman's trading desk? Does persistent manipulation / insider trading change your hypothesis or render hypothesis formation useless?

4. How do you know whether the move is merely noise of your correct hypothesis, or part of a regime change you have not noticed?

5. Deep and abiding doubt is essential to science, but how do you incorporate doubt into market prediction when most of the movement is random?

6. Does the non-linear, mostly random reward system of trading corrupt your judgment (sleep, personal life, etc)? Do some people lead a happy, well-rested life with long periods of gut-wrenching loss alternating with gain, and are you one of them?

7. What unalterable beliefs are necessary to trade successfully? If you hold them, are you sure they are the right ones? Should some beliefs be discarded as a result of a changing world? Are there new ones you should know, and are you confident you will see them when they develop?

Steve Ellison adds:

Margin of safety is a key concept in many fields. While skiing, I put on the brakes a bit earlier than I absolutely must so that if I miss my footing or hit a patch of ice, I have another chance to avoid the hazard (e.g., other skier, tree, out of control speed). Graham and Dodd wrote about margin of safety in investing. Rather than buy a stock that is below book value, a value investor might wait for an opportunity to buy a stock below 80% of book value.

If I ski 10 times a year, even on the same mountain I am likely to encounter 10 different sets of conditions — temperature, wind, length of time since last snowfall, etc. One day last year, the fog was so thick I could not see the trees on either side of the trail. Some conditions dictate caution; others are more forgiving and allow me to be more aggressive. A warmup run is an excellent way to get a feel for conditions.

Nigel Davies proposes:

Checklists are very good whilst learning, but I believe that one should ultimately aspire to be able to do without them because everything has been internalised. In my own field I tend to believe that conscious thought of any kind can be a distraction, which is why I don't like the old Blumenfeld Rule (a checklist used before playing a move).

Ken Drees writes:

I just did an experiment with my son with one of his Christmas presents, an electronic learning kit. We have learned so far the basics of how electricity works. Resistors (series and parallel), Capacitors, etc. Each lesson has a page explaining the experiment, a schematic, a drawing of the circuit in relationship to how water moves through pipes — the water analogy for electrical flow resonates with my son. And each experiment has an electronic "wiring checklist'.

The checklist comes in handy since its easy to forget a connection, misrun a wire, or leave an extra connection from a previous experiment in the lab circuit.

I associate checklists with "must have"–high accuracy functions. Like programming, wiring, piloting, fixing a car, cooking –its all routine, but items can be omitted, done wrong and can be forgotten due to human error. The checklist is a tool, an aide that removes ego from the scenario. Used in trading it helps set the trade up, helps initiate or close the trade, and removes emotion from what needs to be done automatically. A checklist in the grey area of a trade like the middle game in chess, or an operation where the patient is being worked on really doesn't help much–you need to make gut-inferred decisions, unless your trade is so automated that you remove yourself from the trade entirely and rely upon a program.

Using trading checklists help bring focus and energy towards the trading exercise. Using checklists of some sort during the "live–life of its own phase of the trade" must be explored further. Maybe there are ways to check off your decisions, check your options, use your skills with the pressure of time taken into consideration–during this live phase.

But when your hand is on a hot stove, trade going wrong, does one need to look at a post-it-note do determine if one should remove hand from stovetop?

FYI: a 9 year old boy is understanding electricity –public school may teach a child these ideas in 7th grade. I am amazed at what can be taught to children that most think is way over their heads.

Alan Millhone adds his two cents:

I will add my two cents. Some years ago I bought an International dump truck and it has air brakes. My late father and myself drove it for use in our construction projects. Because it has air brakes you need your class B driver's license to be legal. We drove it several years without the proper license. Finally my father got the book and studied and took the written part for class B. After he took that part he gave me the book and I studied and took the test and passed. Quite a book to study.

Now the second part was an over the road test with the instructor in the truck with each of us. He said he had never given a back to back test to a father and son. Dad and myself had to back the truck then drive to the right close as we could to an orange cone– without touching the cone. Then each of us had to do a 50 point check list of our truck that we earned (I still remember the list ) and still check my truck before taking it onto the road. So checklists are valuable in many applications ranging from dump trucks to the Market.

On a side note, dad and I rode to the test center in our dump truck without the proper license. The instructor said he was not going to ask how we got there.

David Brooks comments:

All very good ideas. I wish there were some good way to test Atul's theory historically. Why? Because I am convinced that poorer outcomes in the last decade come from fragmentation of the system - shift work, decreased work-hours by house staff, the high volume being forced through the system and de-professionalation of nurses.

Alas, we can't measure the past, but I am convinced that the hospital I started in (The Peter Bent Brigham of the early to mid 70's) was a safer, more humane place with better (allowing for technological changes) outcomes.

All the same, the reason we have embraced checklists a la airlines has to do more with the aeronautical outcomes than medical outcomes. The amount of information that a pilot has to process is order of magnitudes more than what a surgeon has to process. Furthermore, when a pilot fails completely 300 lives are lost, and when a surgeon completely fails, 1 life is lost. The former is far more dramatic, of course.

It's nice to know the anesthesiologist's and scrub tech's name, but it's hard to believe that that is going to affect the outcome of a significant number of operations.

That said, I have the greatest admiration for Atul. He sits a short distance from me, and I am proud to have had even a small role in training him. He is a remarkable young man and we will being hearing from him for many years to come.

Newton Linchen comments:

Once I took an airplane pilot course, and I was amazed how everything was done with checklists. Actually, the first time I heard the word 'checklist' was there. (Even here in Brazil they keep all the terminology in English, for standard procedure). I realized how checklists can keep you out of trouble and save your life. In markets, perhaps a great deal of losses could be avoided if I followed my own trading checklists.

Russ Sears writes:

Checklists can be very useful in an emergency. I have found that a simple checklist was valuable in a race. When the going gets tough it is easy to panic. The list It went something like this 1. relax 2. pump the arms smoothly 3. breath in normal rhythm (One hard puff out, relax in). It is easy to panic on the edge of your limits. These 3 things are the first signs that you are starting to panicking, subconsciously without knowing it.

Runner, use checklist often as part of their diary. Each day you check your weight, evaluate your nights sleep and your overall mental state. You check your diet and fluid intake .

Before a race you follow your pre-race checklist from what to pack, to when and what to eat, and when and how you should be warming-up and stretching.

Then after the race you check how well you followed the plan, where the plan worked and where if failed.

Finally at the end of the year you check the philosophical underpinnings of your training. Your goals, why you are doing it all, what are the cost that you are willing pay and what is the best path to get there.

So checklist have there place, but you need to 1. put them in the right point of time in the process, 2. not let them lose their relevance and meaning . 3. keep them simple at critical points, simple enough that they are potent.

Easan Katir adds:

Thinking about checklists, and watching the Haiti disaster coverage, made me think about a checklist for emergencies. Then thought about a list of the various types of emergencies one might encounter, big and small. What came to mind:






home invasion


mistaken id

false accusation






missing person


currency replacement/devaluation

market crash

partner deceit


power outage




i suppose each needs its own checklist, though some may overlap. What did I miss?

Scott Brooks adds:

The best checklist you can have is to either be a great leader or be around a great leader.

It's been my experience that average and ordinary people need checklists (which they rarely if ever have or use…which is one of the reasons why they are average and ordinary), but smart people with leadership skills don't need a checklist when it comes time for a disaster.

Most disasters/problems rarely follow a fixed pattern. It takes a leader who is capable of thinking on his/her feet who can stand up, take charge and direct people as to what they need to do.

And this doesn't have to be right all the time, he just needs to make decisions and get people moving and be willing to take responsibility and shrug of criticism of the naysayers…..while listening to them to extract the wisdom that might be contained in their "naying" (I think I have just made up a word).

A leader has to have insight and the ability to see several moves ahead. A leader has to be able to see correlations and connections between seemingly disparate pieces of information.

A leader has to then take this data and formulate a solution and then direct people to execute the solution….and if possible, get people to see the vision of the completed project so that they can begin to work towards that goal with minimal supervision.

But most importantly, a leader has to be willing to make a decision when it comes time to make a decision even when the solution is not apparent. A course of action that fails is better than inaction that is guaranteed to fail.



wheatFrom the 1980s up to 2005 there was a phenomenon in the wheat market that locals referred to as the "Noon Balloon." Four days out of five, the market would rally 2- 3 cents on big volume at the noon hour, then settle back after we sold into it and the buying stopped. It was so regular, that we'd start bidding up the market a few minutes before noon, hoping to get the buyers to pay even more.

Many a fortune was made on this anomaly and it was our personal ATM machine. The Noon Balloon curiously disappeared with the demise of REFCO, and was just one of those quirks that a sagacious person on the floor could exploit. Since so many people jumped on the Noon Balloon, the effects were exaggerated. Whenever I see an uptick in wheat at 1PM (12cst) I fondly think of the Noon Balloon.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

Victor Niederhoffer observes:

A published report relating to an irregularity supposedly found regarding afternoon movements has been disseminated by a very profitable brokerage. The subsequent comments relate to the layers of meaning and deception behind such reports. 

Jeff Watson comments:

Not all players have the same motives in the markets, Case in point, hedgers will sell no matter what the conditions might be. Certain commercials will play with spreads, defending them for no discernible reason. Many games are played in the delivery months, and with deliveries being re-delivered, and on and on. Commercials try to stack the pit committee, and play with the settlement price (which is not necessarily the last trading price), for their own gain. Despite the fact that trading has mostly gone electronic to improve market efficiency, a whole new series of land mines has been laid down, part of the law of unintended consequences.

Tom Marks writes:

The question of a published report with an intra day trading regularity arises from Victor and he suggests that something seemingly useful like that must have an ulterior motive. I demur. But what if they figure that the jaded such as ourselves have figured that out that nobody provides gratis which otherwise provides profits, so they in turn fade the faders. Especially when they have the wherewithal to cross-check against the order flows of whom was provided with that report in the first place. Artful deceptors rarely ply their craft one-layer thick. They like suggest texture and added dimensions. A trompe l'oeil effect that fools the eye. 

Nigel Davies adds:

The fact that the effect has been noticed and publicized seems likely to make it behave differently from the past. At least some traders will want to jump in ever earlier to exploit it, and then there will be those who fade them etc. But the last thing I'd expect to happen is an exact repetition of the past…

There's a good chess analogy to this in that the champions tend to set new opening trends but move on as soon as the crowd has noticed.

GM Davies is the author of The Rules Of Winning Chess, Everyman, 2009

Phil McDonnell writes:

To echo the Chair's observation I once reviewed a quantitative study of some market anomaly. It showed that some 700,000 (!) trades backtested would have been 80% profitable over a 10 year period. The authors were a well known TA writer and his researcher. Although the report had none of the usual tests of statistical significance that we might use here, still the sheer magnitude of the number of observations was compelling.

Nevertheless publication alerted the antenna and caused me to ask why. I redid the study on a smaller sample for the most recent year. In fact it lost money in the recent period. Hence the reason for publication — it no longer worked. But it enabled the authors to keep their names in the press.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Tom Marks responds:

Perhaps the real intent was to get the market so confused over this "anomaly", that no substantive moves would happen around 12:30, and those at GS could get a bite of lunch. Like the strategy we played with my 7th grade social studies teacher, simply mention Vietnam and you could ignore him and safely work on your math homework for the next hour.

Russ Sears writes:

When it comes to deception, there are different strains, some ultimately less problematic than others. Toward that end, the 7th grade social studies subterfuge may be as benign as it is precocious as it is brilliant as it is utilitarian. Everybody wins. The teacher gets to indulge his fixation, maybe even sharpen some pedagogical skills, while the kids learn how to best juggle academic time constraints by effectively calling some sort of curriculum timeout.

Sure, in terms of flawless honor, it's a little chipped, but so is the Venus de Milo. Doesn't make either any less a work of art.



 Trading hours upset the circadian rhythms of millions of people and we need to learn the side affects of sleep deprivation and how to deal with them.

Jim Sogi agrees:

When you don't sleep enough you get grumpy, uncoordinated, depressed, groggy. It's bad news.

Nigel Davies comments:

If trading does that to someone and he can't find a way around it — smaller position size, some kind of healthy stress relief — he should quit. It just isn't worth it.

Phil McDonnell explains:

A considerable amount of research has been performed into our nightly dream cycles. The typical cycle lasts about 90 minutes. So in six hours of sleep we get four completed cycles. In 7.5 hours we get fvie cycles, in nine hours we get get six. Note that eight hours does not give us an even number of cycles.

The importance of a full cycle was established a long time ago. When sleep researchers monitored test subjects and woke them at their deepest part of the dream cycle they were shown to be mentally impaired on simple cognitive tests. Awakened subjects could remember their dreams.

Subjects awakened after a full cycle performed much better on the same tests. The full cycle subjects could not remember their dreams.

Ideally sleep should be an even multiple of 90 minutes and one should awaken with no memory of the last dream. A corollary to this is that if one is awakened after, say, six hours and cannot remember a dream then it my be wise to get up. This is especially true if one feels refreshed and cannot stay in bed for another full hour and a half.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008



 Aristotle once said, "All paid jobs absorb and degrade the mind" Is there any way of quantifying this, and are there any implications in the markets, life, and trade?

Aristotle also said, "We are what we repeatedly do. Excellence then, is not an act, but a habit." Does this extol the virtue of practicing until we get it right? How does one know if they are getting it right, and if they have the proper tutor.

Aristotle wrote in his Nicomachean Ethics "It is not always the same thing to be a good man and a good citizen." I've been wringing my head trying to figure out all of the different philosophers who have borrowed this idea, and have come up with a list of at least 20. Any help in compiling a complete list would be appreciated.

He also wrote in Nichomachean Ethics, "It is possible to fail in many ways…while to succeed is possible only in one way." I would like to disprove this as there are more than one path to success.

Kim Zussman replies:

Do a twin study:

Find pairs of identical twins (same genes) with different employment histories. Best would be congressman vs. doctor. Failing that, find pairs with large differences in total hours worked to date.

Perform intelligence testing on the pairs, and use paired t-test to check for difference as a function of high vs low prior work/brain wear.

A related study could be done on the productivity effects of wearing robes and fondness for little boys.

Jim Sogi writes:

At the risk of disagreeing with Aristotle, excellence is a constant struggle. At least for me it is. Habit implies some sort of easy continuation. Constant vigilance is very very difficult. Excellence also connotes superiority over others. Thus there is a the constant pushing and straining to excel over others who try even harder.

J.T. Holley replies:

I don't think Mankind or Aristotle (all thought is a mere footnote to him in Philosophy circles) should be given a break at their points in time now that we've evolved Capitalism to the point it is today. Seems to me that the most important principle here is that what was shared by Susan Niederhoffer the other day "everyday seek out knowledge". In the agrarian society that was around in Ari's time we can certainly understand that doing some "meaningless paid job" took away from the devotion, persistence, focus and the ability that Ari had at driving forward to thought and knowledge. He is reluctant to realize though that the underlying power of Capitalism and his own mind freed him up to pursue his own thoughts and not degrade his mind.

"We are what we repeatedly do."

I happen to agree with this but not in totality. His teacher Plato spoke of to paraphrase "to know the good is to be the good". Much more objective than Aristotle's "do do the good is to know the good" of which leans towards being subjective. I think both are acceptable in "being". Case in point is Plato's "Allegory of the Cave". Being tied to the post the man competed and "repeatedly" learned to beat his peers at guessing at the shadows, but once freed and outside the cave he saw the light! The objective in this allegory trumped the subjective that was thought to be the truth. The objective with the subjective seems to be balanced though if we apply Aristotle's "golden mean" that he also mentions in Nich. Ethics. A wonderful balance of both instead of just one or the other.

"Nicomachean Ethics," he said, "It is not always the same thing to be a good man and a good citizen."

Kierkegaard found and wrote of this as well. He found great power, strength, and lessons in the paradox and hypocrisies of life. His three stages of life's way is a good example of this with the movement from aesthete to ethical to final religious. In the final stage of religious for Kierkegaard he used the Paradox of Abraham to find his strength. Being told by Gawd to go to the mountain and sacrifice his son what thoughts must have been in his mind and that of his town or family? He was either a lunatic by most or the most devout believer in Gawd's word. Kierkegaard spoke of the "fear and trembling" that must've been going on as the knife was thrust to the air to the point to where it was almost at apex to come down into his young son's chest. "good man" or "good citizen"? "religious" or "crazy"? Of course as the passage goes he didn't have to ultimately sacrifice his son but the lamb. The paradox was there though when thought and decision was made to be true to himself.

He also wrote in"Nichomachean Ethics," "It is possible to fail in many ways…while to succeed is possible only in one way"

to quote the Chair "The best way to achieve victory is to master all the rules for disaster, and then concentrate on avoiding them." Trial and error is important in life and speculation. The pain from failing can often lead us to being better individuals and profit takers.

Nigel Davies writes:

GMI think there are a number of problems in discussing 'ancient wisdom', for example culture, language and context. One might ask what defined paid and unpaid work in Aristotle's time? I'd argue that to really understand what he was saying one would have to be a several thousand year old Greek.

As for the internalization of excellence (i.e. habits), the valuation of such may depend on whether one prefers 'reason' to 'intuition born of vast experience (ie habits)'. Taking a different angle on this, does an inexperienced but opinionated newcomer deserve to win against an old hand? Humans value their reason, but maybe this is just vanity talking.

Peter Grieve adds:

I bow to no man in my admiration for the literature of classical Attica, but Nigel has put his finger on a weakness. The surviving philosophical writers did tend to value reason over experience. This may be why they made tremendous progress in mathematics, but were dreadful scientists and mediocre engineers (Archimedes came later, and was a Syracusean). Their mathematics was largely intended to support astrology, for heavens sake. This is in line with their feeling that people who actually produced anything were of a lower order. Apparently people were amazed when Socrates spoke to artisans in an attempt to find answers. Aristotle's attitudes about paid work may reflect this bias.



 One of the great things about trading is that it brings you face to face with many of your personal faults and shortcomings. With maturity should come recognition of personal faults. Unfortunately, some or most of these personal faults are not easily fixed and are real limitations. Of these limitations, some are psychic but others are physical, such as hearing loss. Psychic faults are anger problems, narcissism, etc. These faults can be damaging to your life, your loved ones, to your bank account, and to your health.

It is important to recognize and deal with these faults. Faults are easy to see in others, but almost impossible to see in yourself. Very very few can recognize their own faults and limitations. The most common response is denial and shifting the blame to others or outside forces. Many elderly people have hearing loss, but for odd reasons, deny it. They blame others for mumbling. Alcohol addiction is a prime candidate for denial. The list goes on.

It's difficult to deal with the realization that you have faults and limitations. People can be unbelievably obstinate in denying faults that seem so obvious to others. It makes it hard to perform and live on. Who wants to live with the realization that you may not be as smart or as tough as you think? That is why the easiest solution is denial. In many cases even if the fault is recognized, it is hard or impossible to cure. It may be hardwired in, or it might be caused by a physical limitation. The answer is creating some sort of workaround that minimizes the damage caused by the personal fault or physical limitation. A simple fix for hearing loss is a hearing aid. Other faults present greater hurdles to find a solution or to even to recognize.

Nigel Davies writes:

There's still room for self-deception in markets regardless of the bank balance; you can lose when playing well or win when playing badly. And this may be especially pronounced with methodologies which have a high percentage of winners plus a few big losers.

Chess tends to have less of this because your results contribute directly towards a published rating and each win or loss has a fixed value. But if someone really wants to kid themselves they can do it there too.

Sushil Kedia adds:

Markets produce the same series of prices, volume, open interest etc. for each participant, yet the individual performances off the market are so different. I thus conclude that none makes any money off the market and each makes money off themselves utilizing the market as the proverbial touchstone where the self is rubbed.

It is the different speculations originating from the unique anticipations that differentiate each performance. The attitudes, beliefs and convictions that form the a,b,c of any personage reflect in the choice of systems, choice of methods, actions taken, actions avoided etc etc.

This could well be true of any profession, yet the instantaneity with which a mind interacts with the financial markets makes for the most expeditious feedback system. Marked to market is an idea that is most easily implementable in a trading / investing career. Like a mirror the market reflects you only. For all the cosmetics that is around it is still said that the mirror never tells any lies. So for all the cookery and creativity that can be and is, the P&L eventually never lies.

At a recent past when the credit marts were being forced into dispensing away from the MTM requirement because all the mirror was displaying was a sad requiem of the dead bodies, the dyeing bodies, the destructed youth and vigor it was an ostrich burying the head in the sand act. Hope, free markets will never again give up the reality check and fault facing device ever again but have the courage to give up the dyeing or dead that are so horrified to look at themselves in the MTM mirror.

Russ Sears writes:

What this analysis is missing is that many marked to market advocates miss are many markets are not liquid. Further, many markets even liquid markets quickly can become illiquid. The policyholder does not choose what bank to use based on market forces, nor the bank what to invest in based solely on market forces.

Because your neighbor trashed his house, and then let the bank take over may suggest that you personally lost some value to your house.

When several of your neighbors do the same… you have lost even more on paper. Have you lost any real wealth? Should you be forced to sell it, if your marked to market nearest neighbor model put you underwater?

Likewise, when there was too many buyers,not liquid enough seller and your price doubled. Did your wealth really increase, if you stayed put?

Taking out the collateral, and accepting the inflated prices as Marked to Market prices on home equity loans got alot homeowners an banks in trouble. Should the banks be forced to lend if they believe the house price is inflated long term?

If you want to have Marked to market to determine "death" then you must have true market forces determining if a bank is dead… not some regulator who will be forced to jump the gun to give the organs to those on life support. The markets would if allowed, no doubt determine how close a bank really is to death by a very broad flexible array of models, not some fixed regulators model. And these models will limit who and how many of these potentially illiquid loans a bank would be willing to hold, not some regulator.

Currently death is determined by marked to model… so there is enough left in the company that FDIC can survive. If policyholders where forced to make this decision themselves, Without regulators setting up an arbitrary marked to regulatory model cushion of protection, the policy holders and the banks would be forced to be more conservative and transparent to gain the policy holders trust. And the process of a death would be much more gradual, with a risk premium limiting how much of these potentially illiquid assets it would hold.

Marked to market is only good if you can tell me the liquidity premium. In a market set up for marked to model then forced to switch to marked to market, this premium is bound to jump.

In a market full of few buyers and a forced domino effect of sellers, this premium must to be very high. If you do not trust the models, it is not estimable.

In short, you can not have a clear picture using regulatory forced markets and models at the front and then switch to marked to market forces on the the Death bed. Policyholders with the moral hazard blurred vision using regulators simple marked to model glasses at the beginning of the process (which bank to invest in), regulators telling banks what they can successfully invest in using simple capital model and then using a comprehensive marked to market process on the death bed. They would all fall together.



 The best books on deception are the best books about the market. The best book about the market according to Martin Shubik is Ben Green's Horse Trading. I would add that there is a good section on deception in EdSpec. And I would point out that a systematic categorization of deception is essential and this is available in the ecology literature following J.R. Krebs's citations on deception in various species, especially monkeys.

Adam Robinson says:

Of course, as I've eulogized no end, The Farming Game by Bryan Jones also has much to say on deception in the buying and selling of livestock, and does so with wit and insight.

Alston Mabry recommends:

I like A Treasury of Deception: Liars, Misleaders, Hoodwinkers, and the Extraordinary True Stories of History's Greatest Hoaxes, Fakes and Frauds by Michael Farquhar.

Russ Herrold re: The Farming Game:

I purchased The Farming Game on your recommendation and enjoyed it.  It was a bit dated as to price examples (they look like a series from the mid 1960s to the mid 1970s), but the underlying principles remain sound. The book starts a bit slowly, setting up some stereotype character sketches, and then strings them together a bit, a bit later in the book.

Kim Zussman writes:

Here is my Deception reading list:

Stocks for the Long Run, Siegel
Irrational Exuberance, Shiller
A Random Walk Down Wall St., Malkiel (efficient markets)
Beating the Street, Lynch (inefficient markets)
Trade Like a Hedge Fund: 20 Successful Uncorrelated Strategies & Techniques to Winning Profits, Altucher
The Intelligent Investor, Benjamin Graham (value)
Common Stocks and Uncommon Profits and Other Writings, Fisher (growth)
Futures: Fundamental Analysis, Schwager
Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications, Murphy
Contrarian Investment Strategies - The Next Generation
, Dreyman
Trend Following: How Great Traders Make Millions in Up or Down Markets, Covel
Momentum Stock Selection: Using The Momentum Method For Maximum Profits, Bernstein

(eigenvector = deception)

Vince Fulco adds:

To Dr. Zussman's excellent list, I would add another one very much off the radar screen. In Hostile Territory by Gerald Westerby is purported to be written by a former Mossad agent and profiles his adventures in Africa, the ME and Europe.  I consider it of the best books written on the manipulation of human perceptions, mental flaws and frailties.  I try to read it once a year to condition myself to avoid the traps. It is right up there with Cialdini, but the dynamic and life threatening challenges faced by the author are much more entertaining while providing extraordinary lessons on the subtleties of behavior.

I found the walk through on structuring a diversified [here: agri-]business very approachable, and anticipate lending it out to give context for further discussions to some I work with and mentor.

Jeff Watson comments:

The best book I ever read on deception was called The Game by Neil Strauss. This book is the holy grail for pickup artists, but the lessons easily translate into all areas of life from sports to trading to games. It was very entertaining and well written, znd Strauss gives point by point instructions on how to manipulate, deceive, obfuscate, hypnotize, and control your opponent or object of desire. Strauss takes time to delve into the science of how to pick up women, and believes in rigorous testing and the book surprisingly isn't as misogynistic as one would expect.

Bruno Ombreux writes:

One absolute classic is Arthur Schopenhauer's The Art of Controversy. It also goes by a different title: "The Art of Being Right". Here is a Wikipedia article with the full list of stratagems. And it is available for free at Gutenberg.

Kim Zussman writes:

The most respected investment books of the 20th century all have eigenproblem of hidden utility. Even when authors are intellectually honest, it's hard to understand how they could escape distortion induced by rewards.

Some are selling their strategy (read my book but invest with me), talking their book (I'm deep into growth or value, so please buy these), pandering the academy (status as published professor), making a career of teaching how to trade, increasing status, creating a legacy, etc. This is similar to the more general, "how many friends do you have who don't profit from you?"

Bruno Ombreux responds:

I haven't read all the books in Dr. Zussman's list, but among those I've read, I think two are not deceptions:

A Random Walk Down Wall St., Malkiel (efficient markets)

Most investors would be better off reading this book and stopping there. Also:

The Intelligent Investor, Benjamin Graham (value)

I haven't finished this book because after the first two chapters I realized it was just a watered down version of the first edition of Security Analysis, from the same author + Dodd.

Security Analysis is an excellent book that makes excellent points for the era it was written in. Their technique of looking into detail at companies accounts is similar to detective work, which itself is an application of the scientific method. In my opinion, this kind of financial analysis is a valid way to proceed.

Nigel Davies comments:

The nature of deception may be much deeper than many authors make out. I would say that the origin of all deception is in fact self-deception and that the supposed 'deceiver' is doing nothing more than moving into the vacant space within our understanding.

George Parkanyi writes:

 There is a saying.  "Fool me once, shame on you.  Fool me twice, shame on me."  To me it's just a given that traders, particularly those trading in size, use techniques to mask their intentions.  And sure, those that have knowledge of them, run stops.  That's just one of many influences that make financial instruments wiggle on a day-to-day basis, and you would not only have to sort out what is "deceptive" behaviour vs stupid vs herd behaviour, but whether the deception was or was not in your favour.  Unless you have a large network of people you can call on the inside that can give you information that helps you take the temperature of a given market, I don't see the point of trying to personify this market move or that market move as "deception", especially in a big liquid market that is essentially a non-linear system subject to multiple influences. If there's a pattern that you detect and can exploit then so be it.  But does it matter if it is "deception" vs. sentiment or just a big whale moving through?

Don't get me wrong. Reading about deception is certainly interesting. As a Scout leader, Arthur Baden-Powell's role in the Battle of Mafeking during the Boer War is an excellent example.  In fact, BP's entire early career was based on deception.  But I personally don't see the value in getting overly concerned about deception in the markets, though I understand that others do.

I think if you have a general sense of the day-to-day character of a market that you have researched and trade regularly, and do some research to try to anticipate macro influences on that market that might cause it to trend, the rest can be handled with money management.

Stefan Jovanovich replies:

Baden Powell's energy as a commander was probably the decisive factor in having the deception succeed:

From British Battles:

Baden-Powell conducted the defence of the town with great energy and resource, leading the Boers to believe there was a larger garrison than was the case. In November 1899 Baden-Powell launched a series of raids on the Boers lines that caused him some casualties but made the Boers wary of the garrison.

Initially the Mafeking garrison had no artillery. Baden-Powell improvised various items to look like real guns and trains, while engineers manufactured a gun, known as the "Wolf", from a length of steel pipe. The Boers used the 2 two inch guns they had captured from Dr Jamieson to bombard the town. Dud shells fired from these guns were reworked and discharged at the Boer lines from the Wolf. An officer found an old muzzle loading naval gun serving as a gate post. This gun was christened "Lord Nelson" and drafted into service. Dynamite grenades were manufactured and thrown at the Boer lines and a small railway line was built across the town.

In sharp contrast to the indolent Ladysmith garrison, Baden-Powell kept his men constantly on the move, raiding the Boer lines and keeping the besiegers on their toes.

Scott Brooks adds:

Atlas Shrugged not only speaks of deception, but the deceivers are open about their deception. The deceivers/looters are like gangsters who are in complete control in kick sand in the faces of the producers, daring them to say A is A and damning them if they do, all the while fooling the masses with their A is B pablum. The parallels to our world today are stunning.



The subject of victimology (Psychology Today, January 2009) has fascinating market implications. What if market predators had a similar unspoken consensus about selecting victims, and what would be the signs?

Within a few seconds, the convicts identified which pedestrians they would have been likely to target. What startled the researchers was that there was a clear consensus among the criminals about whom they would have picked as victims–and their choices were not based on gender, race, or age. Some petite, physically slight women were not selected as potential victims, while some large men were.

Don Chu comments:

Very true. And a very good read in the reference provided, especially the following: “the criminals were assessing the ease with which they could overpower the targets based on several nonverbal signals–posture, body language, pace of walking, length of stride, and awareness of environment.”

A natural question following the one posed by GM Davies above may be: what if the would-be ‘victims’ are actually predators of a higher order, masking their true abilities and intentions, and displaying their ‘weaknesses’ both as a ruse to deflect attention as well as a bait to lure an attack, all the while poised to engage+respond with hidden ‘primed power’(势)…

After all, deception is a large part of any engagment, be it in the natural world, war, individual confrontation or the financial markets.

The Thirty-Six Stratagems (三十六计): #27-Feign Madness But Keep Your Balance



Cachaça"Trading is fun", I hear once in a while. It's a "cachacinha" ("Cachaça" is a Brazilian alcohol beverage made from sugar cane). They mean, trading is addictive. From "fun" to "addiction" it takes only a small step.

I was once addicted to trading. My account suffered. It took a LOOOOOONNNNNGGGG time to free myself from the addictive power of the markets. Now I'm making money, for me and for my clients. Guess what? The fun is gone. The fun is completely gone, for I'm using a method to improve profitability and reduce overtrading (overtrading leads to poorer performance), and, as a side effect - and what effect! - the emotions of trading are gone.

Whoever you talk about trading, they will tell you amazing epic stories about great bravery, suffering and battle. They include all emotions: fear, greed, joy, pain, etc.

Few, very few people will tell you that trading is boring, just like factory work. Guess what? The emotional traders are not making money. The boredom traders are taking money from them!

What is boring about trading? To be honest, to quantify is boring. It takes time. It takes effort. It takes more time. And it takes more effort. So it is to parameterize. To test is boring. To avoid spurious correlations is boring. To avoid anedoctal evidence is boring. To do the same trades over and over and over is boring. To not deviate from the plan is boring - specially when your gut feeling makes an extraordinary call about the markets. All that is boring. Boring. Boring. Boring. Boring.


It makes you money. Trading is such an interesting field that one cannot get FUN and MONEY at the same time.


Nigel Davies comments:

The acid test may be if someone stops trading, will he miss it? Chess stopped being fun for me a very long time ago, but when I don't play something is missing. Some colleagues who've given up say this goes away after a while, others keep playing their whole lives. The progression seems analogous to being in love, being married and breaking up.

Nick White responds:

I don't know — I think trading can be enormously fun. I think what Newton is really driving at here is the difference between process and outcome and the balance of emphasis between the two in different groups of traders.

I would argue that process-driven traders spend much more time doing "dull" activities like researching, programming, quantifying, testing etc. Furthermore, I would say that traders involved in these process-driven activities do so because they genuinely enjoy being in the market, love the challenge / intellectual stimulus of trading and are committed to learning as much as they can.

Focusing on process grounds the trader - if the trader gets it wrong, she has a foundation to revisit her thesis, look at the data and learn from her mistakes. If a trader is doing well and trading at his high watermark, a process-driven focus helps him fight hubris. The NYT article about Shane Battier had it exactly right - process driven performers don't measure themselves explicitly by whether they won or lost on a particular trade - they measure themselves on whether they did the right thing at the right time given the information they had. So, net-net, process-driven traders are likely to enjoy the activity of trading irrespective of the final result: they like the research, they fight for their edge and they play it. If they win, so much the better. If they lose, it still sucks, but they can put that loss in perspective…the kicker being that enjoyment of process-driven activities gives a much higher likelihood of getting positive outcomes in the first place.

On the other hand, outcome-driven traders seem to want the high of good pl without the necessary work to ensure non-random results. They seem to trade to prove something either to themselves or others. I'm sure Dr. Steenbarger and Dr. Dorn would be able to contribute much on this point but, from my amateur armchair, I would say that traders driven by outcome aren't really into trading because they like it, but are into trading as a proxy for some other need they are trying to fulfill. In that sense, trading probably is addictive for much of the same reasons that any activity or substance can become addictive - it likely helps to reinforce desired feelings and self-image while shunning unwanted ones.

In short then: if you trade because you love it and like doing the research work for its own sake, then you are more than likely going to enjoy trading irrespective of the final result - but you also have a greatly increased chance of success. Trade to "be" something / somebody and you are likely to come unstuck quite quickly. (All this is said with the caveat that these two camps aren't neatly delineated, but seem to be something of a spectrum, with all of us lying somewhere on the line at different stages of our careers.)

Process can be dull; no doubt about that. But, as an old coach once told me, "what you can't do in training, you won't do in racing". If you haven't spent the time to quantify, test, understand and introspect about how you would approach your chosen market in a given situation, you won't know how to respond when it happens for real. It is one's emphasis on process / outcome that determines whether results are a statement about one's self, or are simply indications of progress on the path to improvement.

Philip J. McDonnell remarks:

One of the trading mottoes I live by is:

If trading ever gets exciting I am probably doing something very wrong.

The underlying logic is that losing is what makes trading exciting. Think about a savings account. It always wins and is very boring. It is boring because it wins. The losses appeal to us emotionally. They create the nor-adrenaline rush. It is too easy to get addicted to the rush. The adrenalin driven figt or flight mode satisfies us emotionally but numbs the mind. Slow and steady is better and frees the mind to think logically.

Newton P. Linchen replies:

Phil just nailed it!



S EllisonA recent Wall Street Journal article discusses findings that children born in the winter do worse in school and earn less than children born at other times of year. The first reaction was to search for environmental factors. Did lack of sunlight in infancy cause lasting damage? Did being in the same grade with younger students limit achievement?

Further research showed that heredity might play a role. Births to highly educated women peaked in May each year, while births to less educated women peaked in January. The likelihood that a woman giving birth was married was 2 percentage points less in January than May.

Nigel Davies reacts:

I learned recently that 75% of a child's IQ is from the mother, so it may be purely an IQ thing. As May minus 9 months = September maybe smart women tend to schedule their baby production after their summer holiday!?

David Wren-Hardin queries:

I read the same article, and saw nothing in there about heredity playing a role. It did say, as you say Steve, that the winter-born babies tend to be born to less-educated women. Education is, obviously, something someone does, not something someone inherits.

And to Nigel: Who told you 75%?!

Nigel Davies replies:

A reliable source.

Alex Castaldo adds:

I think I could guess the source's gender.

Gordon Haave is not amused:

Obviously none of you have read The Bell Curve by Richard Herrnstein and Charles Murray.

David Wren-Hardin comments:

David W-HI've read parts of the book. There are some interesting conclusions, but they fall far too far on the intelligence is pre-determined and we can do nothing about it spectrum. Are we blank slates? No, but our intelligence is highly tuned by our environment. That's actually great news — we don't have to simply accept that some people are "stupid", shrug our shoulders and move on. Everyone can become smarter and realize more of his potential.

A more recent book that analyzes some new studies and takes a fresh look at old ones is Intelligence and How to Get It by Richard Nisbett, a Distinguished University Professor at Michigan.

More and more study is showing that IQ is much more malleable to environment than previously thought. For example, twin-studies had been used to state that IQ must be inherited since twins raised in different environments have similar IQs. However, once you control for the selection bias in adoptive parents — people who adopt tend to be more highly educated and have more resources — a great deal of the "heredity" effect goes away. It's still there, just not as strong as previously assumed.

There have also been studies showing how the "culturally unbiased" tests, the ones that are supposed to tease out untaught learning from innate intelligence, are actually highly affected by previous exposure to various spatial concepts.

Yishen Kuik summarizes:

YishenFrom what I remember about studies of intelligence, the key findings were:

1) The correlation of IQ scores by adopted siblings & their natural siblings was 0.0 (ie no different from strangers), whereas those between natural siblings was about 0.6.

2) The correlation of IQ scores of monozygotic twins separated at birth was 0.9 vs dyzygotic twins raised together at 0.6.

Those were the strong conclusions used to argue that environment had far less impact on how well someone scored on an IQ test, compared with their natural endowment. (Note that this does not imply they inherited their intelligence from intelligent parents). How does Prof. Nisbett's findings about cultural biases or the fact that adopters tend to be well educated / wealthier alter these findings?

Stefan Jovanovich writes:

This may not answer Yishen's question directly, but what follows is the sum of what my father told me about IQ tests. Dad had, I think, some credibility on the subject; he made his fortune from running the only for-profit publisher who competed successfully with ETS. He was also smart enough never, ever to voice these opinions to anyone until the year and a half before his death when he decided that he would indulge himself in the luxury of telling himself and anyone who would listen the absolute, unvarnished truth about what he knew from half a century in the book and test trades.

1) IQ tests are unpopular precisely because they are brutally honest and cannot easily be rigged. No one likes their results. The students hate them because they show us all how rare exceptional intelligence really is. The teachers hate the IQ tests because they find that the brightest students are most often not the diligently obedient pupils who copy down everything the teachers say and repeat it back to them on the exams. Instead, the tests suggest that really bright people are unruly and more interested in their own thoughts than other people's. The parents hate them because the test results shout that money alone cannot buy brains. The school boards and administrators hate them because the test results indicate that most of the time spent in class is utterly wasted.

2) There are only three reliable correlations between inputs and measurable academic achievement — the IQ of the child, the IQ of the parents and the IQ of the teachers. Every other metric — class size, spending per pupil, curriculum models (new, new vs. old, old math) have not statistical importance. Dad would hardly have been surprised by Dr. Nisbett's findings since the IQ of adoptive parents is significantly higher than the general population. He would, I think, have disagreed strongly with the assertion that "a great deal of the 'heredity' effect goes away." By far the most important single cause of success was the IQ of the child.

David Wren-Hardin replies:

I agree with most of what you said earlier; IQ is measurable, and people don't like that. What I want to add is that it is modifiable. But past certain points, it may not make a difference on life outcomes. Other traits, such as persistence and the ability to delay gratification, may have greater effects.

I'm not going to speak for Dr. Nesbitt, but on this last point I'd say that the child's IQ has already been set by the environment he came from. My argument doesn't necessarily help the education debate, it may, in fact, it may make it bleaker: Compared to the effect of a child's surroundings in his early years, public education comes in with too little, too late. "Low IQs" are still the parents' fault, but not necessarily because of genetics.

But the take home message to me, and what I tell my kids, is that they can always be better at something than they are now, if they apply themselves at the limits of their ability.

Stefan Jovanovich sums up:

Dad would certainly have agreed with David. He thought that modern teachers' refusal to "teach to the test" was an indication of how corrupt education had become. IQ can be "taught" in the same way that people learn alphabets and sums; be repeated trial and error — taking tests again and again. It appalled him that school was made over into something that was "fun" and "self-discovery." Learning was work, and that is why the students should be paid for their results, even as early as kindergarten. That would, Dad thought, teach persistence and the ability to delay gratification — which, as David notes, are "lessons" that are vital to the growth of human happiness and accomplishment.



On Friday I saw Anvil: The Story of Anvil.

It was the most interesting movie I have seen in a long time. It is an independent film I saw at the Oklahoma City Museum of Art. Anvil was an up-and-coming heavy metal band in the early 1980s. I vaguely recalled the name… I myself was an Iron Maiden and Judas Priest fan. Anyway, unlike Maiden, the Priest, Scorpions, and others, Anvil never made it big time.

The lead two member of Anvil, however, never gave up, and they have been playing together for thirty years. They are broke and work regular jobs, yet they still think that one day they will have a hit album and become world-wide rock stars.

The film is a documentary about Anvil, and their quixotic quest to become world-renowned stars. At first it is amusing – almost like watching Spinal Tap as the lead singer and guitarist "Lips" lives in his fantasy rock and roll world. As they movie progresses, it becomes a bit depressing. The third part is the culmination of their attempt to launch a new album with a new producer, and an attempt to get a contract with a major label. The last scene is fantastic, but I will not tell the readers how it ends.

I spent most of my time thinking about my own life, and the lives of others that I know. When is the appropriate time to give up? Most second rate metal bands from the 80s gave up a long time ago. Are they better off for it? Or should they have kept living the dream? The same could easily be applied to traders and money managers. I for one gave up trading last year. Should I have? How long should I have kept at it before quitting?

This is of course an unanswerable question.

Duncan Coker recalls:

When I was 18 I had dreams of forming and being a part of the next Allman Brothers band and pursed this the first few years of college — much to the detriment of my GPA and class attendance. That dream ended in my early 20s. But I still play and enjoy guitar to this day and my musical friends of earlier days are still among my closest. So I will always be a guitarist, but never a rock star.

GM Nigel Davies analyzes:

There is an answer, but it requires thinking in terms of the journey rather than the perceived destination. As long as someone experiences personal growth as a result of his endeavours (and this manifests itself in a feeling of passion) then the activity is worth continuing. But when it becomes all about destinations (ambition, money, power) then the odds are high that an accident will happen.



Everything you need to know about markets you can learn at rock concerts. From a combination of circumstances, I had the good fortune to attend five rock concerts in the last few weeks with my young son Aubrey, and I have learned so much about markets from each of them that I could write a book about the lessons. If only I had learned these lessons before! When you go to the concerts, the rules are the key. I've found scalpers outside of each, and the prices are always considerably less and the time saved considerably more valuable than the tickets themselves. At first I made the mistake of going to these concerts at the stated time, but I found that the main act always goes on at midnight, and all the preliminary acts, like the undercards on a boxing match or the picadors at a bull fight, are meant only to whet the appetite. Similarly, the market activities before the open are all a facade to get you in, and the main events happen well into the show, usually at the encore, when the audience thinks the game is over, but then the stars play their main song.

YahuI knew that I was going to learn much from them when I attended a Matisyahu concert with Aubrey which I thought was going to be an Asian show. I couldn't understand the language but was surprised to see half the audience in yarmulkes. I asked one of the tens of thousands in attendance, and he told me the language was Yiddish and Yahu was very sagacious and his Yiddish rap contained much sentience. He then opened his arms like King Canute by the sea and asked the audience if it was time to jump in. A frenzy occurred and 25 security guards rushed to the middle and he jumped in, much to Aubrey's delight. "He just jumped right into everybody and they're carrying him on their shoulders." The frenzy is exactly like the POMO that is so current these days with the preannounced $1 trillion that they're going to buy coming every few days, with $7 billion here and $10 billion there, with the cash that's coming in being available for 20 to 1 leverage buy equities. The effect is the same, with much good music coming afterwards with a z of 1.5 or so, but many people getting hurt as they try to stampede in to pass the star down the line. Of course the scholarly Yahu is a stand-in, art imitating markets, of the scholarly Israeli market that exactly foretells the opening on Monday with its Sunday moves and is generally accurate as to what is going to happen in New York from 11 a.m. to the close with its early Israeli close, as presumably they read our mail and don't want to be caught in a state of detallises.

We went next to a TV On the Radio concert which was almost as frenzied as the Yahu one and Aubrey was the only one who liked the music because it was exactly like the amplified electronic beeps that his switch-on electronics for 2-year-olds plays, with no harmony or timbre to it, but strictly rhythm and tones. It's apparently just as much the rage as the Yiddish rapper and of course its the analogue of the electronic algorithms' robotic activity that currently dominates futures and individual stock trading. The best sounds came during the 1 1/2 hours it took each group to set up all their equipment, and I guess the group with the best amplifiers and lighting is the most favored the same way the robots near the exchange and the "banks" that have their debt guaranteed by the Fed so they have all the capital in the world to shake out the mere public who don't have the electronics or funds to compete with them.

I next attended a Don McLean concert and heard his song American Pie, which reminded me so much of all the trendfollowing books that I've read which did so much good 50 years ago and have been voluminous though completely out of date since. Apparently McLean was once a great, and had a hit song, the same way the large man once made a fortune by buying beans on the way up and shorting them on the way down.

Regrettably I did not get to see the pre-concerts of Michael Jackson although my daughter Katie once attended his father's 50th birthday party and got a private showing of the zoo when I was a star. Jackson was once a great, then lost everything and had as his best friend a chimpanzee, and liked to dress up funny and play with youngsters. He was in eclipse a non-entity, but then when he died, he became the most loved and revered of them all. My goodness, I heard this exact story before. Morse is back. He first was famous for bulling up Trolley and Canal in the 1870s but then lost everything in the panic of '77 when Livingston got his start. But then he was a ghost. Still he was spotted while a ghost walking down Wall Street and Radio immediately went up 15% thinking that Morse was back. Well, you get the picture.

I also went to Frankie Valli but he only performed after midnight the same way you have to wait for the close these days to have all the big boys try to switch you out. I'll report on the other rock things I went to, and quantify a few of these things after I get readers' insights.

Steve Ellison adds:

CornI saw REO Speedwagon and Styx last month. REO played first, and apparently many of the holders of the most expensive reserved seats right in front of the stage were Niederhoffering. The section was nearly empty. After a few songs, Kevin Cronin said that he hated singing to empty seats and encouraged others to move forward. However, he had not consulted security. Within minutes, hundreds of people were moving forward, but ushers blocked the aisles, only allowing those who had tickets for the front rows to enter. An analogous event occurred two weeks ago when corn broke above its 10-day high at 340 and moved up to 376 within two days. Alas, the hopes inspired by the breakout were dashed as the price collapsed to below 330 by the end of last week.

Allston Mabry asks:

Ever consider taking young Aubrey to one of Levon Helm's Midnight Ramble shows up in Woodstock? You'd both get a kick out of the rustic intimacy of the barn ambiance, and the music is sublime. At turns, hues of rock, jazz, country, and classical, all in one evening. It's a unique venue and vibe, and the lineup of artists that regularly perform there is a joy to behold. Great spot, cool town.

GM Nigel Davies reflects on performers' reputation after death:

The taboo about not speaking ill of the dead works very well for controversial characters, except of course that they're no longer around to enjoy it. And when there are direct beneficiaries from the sales of the controversial one's products some new dynamics come into play, the thought that the death of the controversial one would considerably enhance sales (I bet many in the Jacko camp considered the possibility these last few years) resulting in extreme guilt (and ever greater praise) should that actually happen.

It surprises me that there hasn't been at least one known (to me) example of an over-the-hill celebrity faking their deaths and then channeling their funds to a new incarnation as this is such a genius career move.

GM Davies is the author of Play the Catalan, Everyman, 2009

Andrew Moe reports on his concert-going experience:

On their current US tour, Coldplay moves from the main stage to several smaller stages positioned well out in the cheaper seats of the venue. In San Diego, they went so far as to set up shop for a few songs at the base of the lawn area that lies behind the assigned seats.

During a particularly engaging number, one observed security quietly clearing a path from the main stage. As the lights went out, the band quickly and easily moved through the packed venue. Once their new positions were established, on went the lights and the crowd went wild. Reminds me of the clearing of the way for certain banks to take positions they later flip to the government for immense profits.

Traffic patterns in and out of a concert offer the opportunity to study drivers under pressure in an unfamiliar environment. This is quite different from the regular commute where a fair percentage of the drivers know both the route and the daily tendencies. The best opportunites in markets come when you have a group (or groups) in unfamiliar territory reacting to intense pressure.



ChessmenIt is interesting to speculate on which people in one's life have characteristics of chess pieces. We have only a limited number of people who are the significant players on our own "team." The design of chess (unlike Go or checkers) incorporates pieces which may symbolize psychological types, and as it works so well in the game, in life do we notice someone who:

The king can also represent spirit or essence which grows through the layers of personality which have long protected it. In this vein gestalt analysis can also be applied to a single personality. We have a part of all these types within us. As chess has evolved to a design that defies all attempts to improve it, its structures may have wider application.

GM Nigel Davies adds:

An interesting idea that is close to others I've considered. The most obvious extension is that the pieces all represent aspects of the personality (psyche, soul) and that our struggle to coordinate the pieces symbolises our attempts to be 'complete personalities'. The forces of the 'other side' are there to provide the necessary resistance that inspires us to grow.

GM Davies is the author of Play the Catalan, Everyman, 2009

Legacy Daily asks:

The people/personality spectrum is perhaps far richer than the chess glasses allow but the situations in which we find ourselves are indeed as diverse as the possible combinations of pieces on a board. But how do the three outcomes (win, lose, draw) mirror life? Also, in life the “queen” or some other piece decides to sacrifice another piece or move in a direction. While in chess the player rules and dictates all of the moves. Who’s the “player” in life?



CottageI'm currently in the process of trying to buy a place to live humble abode in the English countryside and I thought that today's events might be of interest. I went to the Abbey National (alias Santander) for a mortgage and a smartly dressed lady called Jan went through the paperwork with me. Throughout the process I got the impression that she was really on my side, looking for ways to make my case fit in with the tight regulation.

Far from being either bureaucratic or exploitative I felt that this particular banker wanted to create a deal that would work for both the bank and me, providing me with capital that I need to escape renting whilst making a decent profit for the company she works for. I had to come in a second time, this time with my son, and the banker helped keep him entertained whilst trying out different lending options. Towards the end of the second visit I noticed a number of cards on her desk. They were 'thank you' cards from clients who appreciated Jan's efforts in getting them a mortgage. And it was clear that she was proud of them.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005



V KThe hardest part about being a parent is setting your own example. It is so easy to tell kids what is the right thing to do, but actually doing it is a very different.

Today I washed both cars with my kids (Jonah 8, Hannah 3). It would have been so much easier to pay $20 and take cars to carwash. Well, after two hours of hard labor, the kids feel that they accomplished something, I feel tired and proud of both them.

Nigel Davies adds:

Given my own son's dislike of being told what to do I figure the best may be to lead by example, spend as much time as possible with him and listen rather than talk. And come to think of it these are all good traits for market people.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Legacy Daily writes:

Children teach us by example as well. They have the ability to bring out the best in their parents — and sometimes the worst. They carefully and subconsciously set up tests to bring parents to extremes to examine the behaviors and to learn from those. Their rate of learning is far beyond our rate of feeding them information. Therefore, they are programmed to learn by observation, through play, through others. Through this process, they create many opportunities for us to learn as well.



C MI've been thinking about whether there's a correlation between trading success and intelligence. Do people with high IQs do better at the trading game than those with low IQs? I wonder if high intelligence is a prerequisite for trading success, or if it even fits into the equation.

Are traders in some markets smarter than those in other markets? Are the index or currency guys smarter than the grain crowd, for instance? Are the upstairs guys smarter than the floor guys? Does higher education really matter, or even have a correlation with trading success? Has any of this ever been measured before? An interesting thing to ponder is if there might be a correlation between juvenile behavior and trading success. Perhaps the most important traits for traders are balance, emotional intelligence, the ability and discipline to execute a plan successfully, and courage. Some of the smartest people I've ever known have been really bad traders, whereas I've known very successful ones who don't exhibit outward signs of extra intelligence.

Newton Linchen adds:

This is a great issue. How many times we sit and shout "why oh why didn't I trade the way I said (plan)?" This happens despite our intelligence — one thing is to be able to "understand" or predict markets — other is to be able to translate this view into action. Perhaps the best strategist is not the best fighter — and it's very unusual to see a strategist-fighter or fighter-strategist.

Generals plan their moves at night, in the tents, but they send the soldiers to do the job the next day.

GM Nigel Davies replies:

Even in a supposedly intellectual game like chess, character plays a much larger part than intelligence. A major part of it is in whether someone can bring himself to falsify his ideas or instead uses what intelligence he has to justify them.

Steve Ellison observes:

I suspect that practical intelligence (synonyms: business savvy, street smarts) is more important to trading success than the type of intelligence measured by IQ. Ben Green, in the preface to Horse Tradin', noted that horse dealers had to know about many factors such as demand, climate, crops, and soils, but then went on to say:

For a big dealer in a central market to be successful he also had to acquire a keen understanding of human nature… None of the knowledge needed by a high-class horse and mule dealer could be learned from books or schools, and it would be well understood that these men were usually middle age or over.

Last but not least, he had to be a man with a lot of nerve, who was willing to back his own judgment and that of his buyers and to face the risks involved in shipping, loading, and unloading (together with the possibility of various shipping diseases) that were a hazard of the business… It is easy to see that with money going out in both directions it took larger amounts of capital, accompanied by a good nerve and judgment, to be a successful central market dealer.



A chess playing friend of mine who is also a poet told me recently that while playing chess, new fragments of poetry flow through her mind.

This rang a bell for me, and I experimented today with setting up an internet chess game on one monitor, and adjacent to it a music manuscript window. I found that while the chess was going on, I was able to take dictation in a similar way on to the music file. (This was very bad for the level of chess moves, but they were there merely to oil a mechanism.)

I have no idea how common it is to have this combination of interests (as a search on Composer and Chess brings up chess problem composers). The well known precedent was Philidor whose music is outstanding. Mendelssohn was also keen on chess. But I am unaware of others. Musician chessplayers are of course numerous.

The novel I am reading right now, The Eight by Katherine Neville, has Philidor among the dramatis personae. I have not read enough yet to be able to recommend it. There are one or two technical errors about chess, but it has made me start wondering again about the origin of the game. It is newly reprinted from the eighties as she has just had a sequel published (The Fire).

GM Nigel Davies replies:

It will dismay many to learn that chess and other board games are descended from religious rituals in which delineated space represents the battle ground between our attempts to have good triumph over the dark side. The conflict between forces under our control and those of chaos (the pieces at the other side attempting to wreck our plans) reflects the battle people face in creating order (sanity) within their own minds.

With music you have what is essentially the same battle in the attempt to create harmony in sound which separates it from the chaos of noise. Of course here you don't have the issue of an agent that is actively trying to destroy your attempts but the process is very similar in many respects (abstraction, harmony/pattern etc).

Markets have some similarities in that there one is trying to find moments of order within the chaos of price movement. Here it's even harder because even the definition of what constitutes harmony is constantly changing.



Most sports games are fought to win early and decisively, given a choice. This painfully obvious comment alludes to the fact that the middle game and end game can thereby be played with less risk for the winning side. However, this must be measured against the opening winners desire to play all out throughout, just with less overextension, not merely maintaining the advantage. Don't let up on your capacity or talent. Some games and teams will require a full force stance, depending on the point lead and in order to play well. What I suggest is not to rest on a gain. I only suggest to reconfigure the risk/reward ratio. Otherwise, playing a completely defensive strategy will destroy the advantage. Further, risk/reward can allow a highly aggressive stance and be defensive by inducing your opponent to expend more than usual amounts of energy and exasperation trying to defend offputting attacks. Inducing is aggressive. These attacks will accompany random, not constant defensive moves on the aggressor's part, allowing just enough of a hedge and freeing up energy from an overly or hardened defensive posture to a game of overall nimbleness, less probabilistic and freeing up energy to explode at will. Thus, the risk/reward ratio is not all about chasing points, but allows for a game whereby opposing points can be thwarted. This alleviates the need and obvious static (stasis?) energy of a defense only strategy, thereby giving the opponent one's game plan.

Entice your opponent to play your game: To play drunken martial arts, which requires enticing your opponent to engage on your terms, running out the clock, angering your opponent, retreating or advancing to entice your opponent to your strengths, or limiting your opponent's moves, , while maintaining full force and adaptability in maintaining a defensive posture also come to mind. (Ali trained to take many a pounding to train for an otherwise superior Foreman in '74 or whatever). One's tactics are freed from having to score. Let the opponent, out of sorts and off their game score for you, in which you make easier points, thus conserving one's energy. The corollary, making one's opponent pay big to even get a point or taking a hit is very offensive. But these are only for the very proficient. These tactics under an overall strategy require or expect the deemed defense having to move, not always true in stocks. (Though Buffet said one can swing when one wants; 4 balls will not get you to first in the stockmarket). An exceptional opponent will not take the bait, but circumstances can force their hand. These thoughts touch on defense as offense. We all know the opposite axiom. As one aside, I'd like to see the drunken martial opponent, and this takes on many variations, in boxing, fencing, racing and war, in which the opponent is enticed to overexthend themselves to the winner's advantage, not move in such a fashion into the opponent's traps. Others may have specific games in mind. I am having the problem of analogizing a specific game; a discrete event compared to the market moves over a term. However, the market moves comprise many a game.

Some of what I consider the more continuous sports are soccer, lacrosse, basketball, hockey, fencing, boxing and tennis, in which one can morph from an aggressive stance, to a defensive one on the fly. Of course, this applies to all sports on a limited degree, like baseball and football where a meeting is called prior to a play. I like the former because the action is more often in play than other games, and therefore the strategy and tactics can be applied with more facilty in real time, of course given prior strategizing. Maybe it's like a free form jazz requiring excellent individual talent that understands the other players, compared to an orchestra with a conductor playing 30 second songs cumulatively. Both comprise professionals. We know the market does both as well.

This writing has suggested employing defensive offense, for example keeping the accent on making high percentage shots that tire your opponent mentally and physically. Do not take undue risks in shooting (offense)and upgrade one's focus on preventing the rival from scoring (defense), rather than setting up your next shot. An advantage within or from a game is anticipating further moves or a later game. This allows for other strategies/tactics to surprise, accumulate to disorient, and induce the opponent to weaken lines in order to defend against all possible attacks. Continuing the earlier discrete game, the early winner can devote more resources to defending the perceived advantage with the above considerations in mind. In fact, the simplistic notion of games is not to take undue risks (this assumes a lifetime of understanding) once victory is achieved, while of course playing all out under revised risk/reward calculations. To confuse things, a good winner will continue to play all out, as that is their best game for cadence and alertness. As a warning, many have lost sitting on a win, confusing defense with merely running out the clock. Resting can beckon atrophy, thereby inviting ineptness.

Another is offensive defense. A penny saved is a penny earned. I would submit that a penny saved costs less than a penny earned oftentimes. Drive to the utmost, but how many feet or seconds does another pit stop cost? Can it be skipped with good preparation and execution being the same car, or is it better to plan for a stop in order to have your best car on the track? A lot of movement in life, like mechanics, etc., has exponential costs, like a rocket liftoff compared to cruising, and the same for other bursts requiring torque, like moving onto the beltway. Make your opponent use torque that require more energy and force pit stops that cost time.

Unlike the stock market, in discrete games, a 2 point win is equivalent to a 50 point win. Can we say that if the 2 point wins accumulate, they will become 50 points and be, just a little little bit easier, to come by?

Defensive offense and offensive defense: do they exits, does it matter, is it semantics? It was just a way to make a point and hint that things occur simultaneously.

In sum, winning big early, frees up an added dimension of facileness, controlling time and moves of your opponent, while increasing one's own efforts to thrive and grow toward an increasing advantage. Maybe all games should be played this way throughout, but an early advantage seems to change the risk/reward analysis. The predators are able to employ this. A good follow up would be to depict what the purported prey would do to become the eventual winner. —Maybe the same? but they seem to have less reward in creating a win from behind by just maintaining the stasis. Advisors often suggest that increased risk is not the answer, until Hail Mary time - at least in a discrete game.

Allan Millhone looks at it from the Checkers perspective:

I am packing and getting ready to head to Grove City, Pa. for a yearly tournament there. There will be plenty of stiff competition with our Three-Move Restriction World's Champion and other top Masters. In tournaments my eyes scan the board akin to surfing and try to find a safe line of play. Like a good wave to ride safely to the King row (water's edge at the beach) . The surface of the Checker board at times can be very smooth as you coast towards an easy draw . Other times the ride is bumpy and can be quite turbulent as your opponent( like the waves) can force you off into uncharted waters. The Market trader needs to be wary and look ahead at all times for ever changing Market conditions much like the waves for the Surfer endlessly shift back and forth. The Checker board starts out even for both sides with twelve pieces each, but soon after the calm subsides and the waters of the board begin to swell . The Surfer tries to Master the wave as the Market trader tries to tame the Market Mistress and gain the upper hand.

Tommy Wiswell said: "Look twice before you move."

Steve Ellison writes:

In many competitive endeavors, simply making fewer mistakes wins many games. Mistakes I have made in the markets include:

- Failing to be aware of changes in trading hours

- Using a limit order to try to save a few dollars when I really did want to enter the trade regardless

- Failing to be fully prepared (with orders placed in advance when feasible) for any events that might set up a favorable trading opportunity

- Entering a trade without knowing exactly what I would do if price moved up, down, or sideways

- Deviating from my trading plan

- Using too much leverage

Roy Longstreet wrote in 1967 in Viewpoints of a Commodity Trader:

Did you watch the Packers whip Kansas City in the Super Bowl? I did and was much impressed by the professional way in which they performed. They did not beat themselves by making mistakes.

A professional makes fewer mistakes than others. That is why he is a professional. He may not have more ability than another but he is superior because he has trained himself not to make mistakes.

I was particularly impressed in watching the Packers throughout the season as they seldom were penalized for infraction of the rules.

On Mr. Longstreet's last point, the Detroit Red Wings have similarly avoided penalties in the Stanley Cup finals. Conversely, the Pittsburgh Penguins, who have probably by now surpassed the aging Red Wings in talent, took a string of penalties in the fifth game after the Red Wings took an early lead. As a result, the Red Wings scored three power play goals and put the game out of reach.

Allen Gillespie adds:

Hawks v Supersonics game I went to years ago - 67-66 after three with only Peyton hustling - Steve Smith scores 33 in the 4th running around like a maniac.  Also, in soccer, most goals are scored very early or very late in a half.

Relationship between time and goal scoring in soccer games-Analysis of three World Cups
Soccer goals and non-guassian distributions

Nigel Davies comments:

Here's another view from a mistake specialist (both my own and other peoples'):

The mistakes we make tend to crystallise around different deeply rooted thinking patterns and attitudes but then change their form when people notice them and try to something about them.

An example might be that of a trader 'taking profits too early', vowing to do something about this and then taking them 'too late'. He could be 'correcting his mistake' but failing to address the real issue of making arbitrary decisions rather than operating according to a tested plan.

Normally you have to go very deep to ferret out the cause of error and then, assuming someone is willing to go there, it's unlikely they'll actually be able to do something about it. But success can come when the number of good moves outweigh the bad, so for those with an innate 49-51 split have hope…

George Parkanyi says:

Making mistakes is not one you can generalize like that. Mistakes are how we learn. If you are not making mistakes you are probably aren't stretching yourself enough. Mistakes also come in all shapes and sizes — some are disastrous, some are benign.

Recovering from, or leveraging mistakes — now there's something.



 I am forever reminded of how and why the chess act itself is not a loaded game. Over dinner this evening I heard about how a much better player was denied selection for an England team in favor of a much better connected player with rich parents etc. Of course it's difficult to manipulate the selections in the face of cold hard evidence to the contrary (results and rating), but it's a sobering thought that this can happen just one small step away from the ultra-objective field of combat that is the chess board. So for the world at large I hold out very little hope that there will ever be any kind of fairness, though I can see the point in trying to defy these odds because of the potential rewards. For example, in markets.



 The swine flu is a powerful media event, and I will be very surprised if its lethality surpasses the last influenza pandemics. The case-fatality ratio is very similar to the usual flu. It is the same virus (influenza), with a different spreading capability and is possibly less susceptible to the previous flu antibodies that we all carry (there´s the potential danger).

I work on a large managed-care company in Brazil, and have reviewed thoroughly the literature for our response team. The population at risk for complications (need for hospitalization, death) is the same that for the usual flu, small children (<2 y. o.), the elderly (>65 y. o.) and people with chronic heart and lung conditions.

We probably won´t see a pandemic like the Spanish flu of 1918-9, ever. People have better nutritional and hygienic conditions and modern medicine is much better prepared to deal with the complications. I don´t mean antivirals here, save your dollars/euros/… . The evidence on the efficacy of antiviral use on influenza is doubtful to say the least.

Some history for the medical literature fans, from the best medical book on infectious diseases Mandell´s Principles and Practice of Infectious Diseases:

Influenza virus has been causing recurrent epidemics of febrile respiratory disease every 1 to 3 years for at least the past 400 years. Although the disease is not associated with a characteristic manifestation such as rash, the high attack rate, the explosive nature of the epidemic, and the frequency of cough allow the identification of some past epidemics. For example, Sydenham’s account of an epidemic that occurred in 1679 is a clear description of influenza. Hirsch tabulated 299 outbreaks occurring at an average interval of 2.4 years between 1173 and 1875. As discussed later, severe epidemics of worldwide scope occur less often and are referred to as pandemics. The first recorded pandemic that clearly fits the description of influenza occurred in 1580, although others may have occurred earlier. Since then, 31 pandemics have been described. The greatest pandemic in recorded history occurred in 1918–1919 when, during three “waves” of influenza, 21 million deaths were recorded worldwide, among them 549,000 in the United States.

Nigel Davies adds:

I learned a lot about this virus over breakfast this morning — one of my chess team members is a doctor:

1) Although this is a new type of flu, there is little evidence to suggest it's any more deadly than any other kind of flu and in fact it seems rather average. The Mexican deaths have not been duplicated in cases outside of Mexico, which suggests that at some point the data is questionable. One possibility is that the victims may have also had tuberculosis but these questions don't seem to have been asked.

2) A face mask is of questionable value, firstly because this virus is now known not to travel via droplets of water in the breath. Secondly most of the commonly available masks just don't do the job, they're effective for about 30 minutes. A more effective defense is to wash your hands thoroughly, especially before eating.

The way the media have treated this thing is really amazing. I'm already free of television but I'm thinking about how to get free of news altogether. Unfortunately there are some headlines whenever I log into Yahoo to read my email.



BaseOne of Tom Wiswell's favorite things to say was "make sure you have a strong base of operations." I find this true in all aspects of life. In the market, it would involve the preparation for the investment or speculation. Certainly having all the equipment and getting in on time. And having the proper capital and vig relations. Certainly not being distracted. Tom liked to say afterwards "checkers is a game of architecture." The importance of a proper foundation in a building, a proper base relative to the tower, and proper communication between the various departments of the building is also clear. I have been thinking of this subject in conjunction with a note I am going to send to Aubrey on his third birthday. It is important to have a good base of operations in whatever you do. Always prepare in advance. Don't rush. Plan what you're going to do. Don't act in haste. Make sure you take in the proper foods. That you get a proper sleep. That you don't run around too much distracting yourself from the important essential goals to survive and prosper. Have a proper financial foundation. Be prepared for adversity. Put things aside in case things don't go as planned. Move forward when healthy. Develop your talents. Get proper mentors.

The thought leads me to suggest something controversial. I am a very weak chess player and my thoughts on it must be taken with many grains of salt. However, i took lessons from Art Bisguier for about 20 years, and I have seen Adam Robinson and Dr. Vic play many games as well as watched many games in Brighton Beach where they played every day. I think from my observations that checkers provides many more life lessons than chess because the rules are less specialized. Moving forward or backward, except when a opposing man is in front of you where you jump, is a very binary kind of thing from which all kinds of ultimate outcomes arise including its proximity to computers, electrical relays, and logic circuits which are also on/off or 0/1 systems. Thus, I would recommend  checkers as more helpful to kids as a game to prepare for life than chess.

Nigel Davies comments: 

I've found myself that the number of rules in chess has diminished with my level of understanding, and I tentatively suggest that this might be applied to all fields.

Douglas Roberts Dimick adds: 

The Art of War, Sun Tzu

Chapter 1 — Laying Plans explores the five key elements that define a successful outcome (the Way, seasons, terrain, leadership, and management). By thinking, assessing and comparing these points you can calculate a victory, deviation from them will ensure failure. Remember that war is a very grave matter of state.

As for state, so to for money…

All battles are won before they are fought.

Anatoly Veltman comments:

 I can speak from personal experience: Aubrey's received an essential for a 3 y.o. memo!

My parents handed me over to a personal checkers coach when I was 5, and I was taught basic framework. Master trainer in charge of Odessa Women's Team took over - within the next year, I've traveled the Soviet Union (without parents) as part of the Women's Team. My paradise ended when other teams filed protest over "unfair advantage". I proceeded to score enough wins in Men's tournaments to qualify for "Master of Sports" title by 12 - youngest in Soviet history of any sport. They exempted me from statutory "age 13" requirement, when I've scored double the required points… And curiously: I was not a "natural". Topping eventually over a million registered competitors in my sport for three straight years in Play-off finals - admittedly, I never felt as the gifted one. For instance: the blind-folded record on 100-square board was 10 simultaneous; but I could never complete more than 2-3 games at a time.

What gave me edge over competition was iron discipline and preparation. At 6, they taught me to sit straight and down-the-middle. At 10, they trained my peripheral vision, so I could gaze the entire 100-square board and successfully transition from the 64-square game. Consequently, I could count 30 moves ahead on 100-square board, without touching the pieces. My coach kept me away from alcohol, smoking and all-night bridge sessions. In course of Round-Robin, I'd review each opponent's favorite openings, prepare surprise divergence and win on time-clock alone. Others in my age category often felt defeated, just taking a sit in front of me. My first trades happened to be in Comex gold, and it surprised me how many of "big punters" were totally oblivious to basic idiosyncrasies. It took me only a couple of 50-lot orders, which remained "unable-on-10" - to figure out that physical arbitrageurs were seeking out 40-lot = 10 400oz bars! It took me a forfeit of a million-dollar unrealized profit in Silver on April 27, 1987 to figure out that Comex notice/delivery rules were skewed in favor of Shorts (over the next two years, I made a client $5m profit based on this quirk alone)… It always amazed me that even largest speculative funds neglected 80-lot Yen futures increments = exactly a billion yen; and worst of all neglected two-banking-day settlement duration. That translated into significant Yen and Gold carry on Wednesday evenings year-round (and a real kicker in front of long weekends and numerous Japan holidays!) Since Nov 1997 split, trading 4 or 40-lot bigSP makes much more sense given new $25/point denomination than 5 or 50; but 90% of the participants neglect that too… Dark pools and market-maker wigs have been a "wet dream" of high-frequency trading outfits for years, translating into billions of nearly risk-free profits for them. Yet, schools and teams of "stock day-traders" continue entering the industry in record numbers to this day…



Security minister Lord West of Spithead placed a bet on Labour to lose the upcoming General Election, it has been reported. The Press Association.

This would probably be funny if I didn't have to live here; on the one hand we are being lectured on the financial impropriety of 'Wall Street', and on the other it seems we have a minister indulging in a form of insider trading.





Doing Nothing As Learned from My Kenyan and Mathematician Friends.

I have said it many times that the reason the Africans are better than the American runners, is they know how to rest to recover. Americans will sometimes try to simulate Kenyan training methods and conditions in Colorado. But the Americans that have been successful at doing so incorporate one key ingredient: lots of Kenyans. Its not that the Kenyans train harder, or that their high altitude environment is superior to Colorado, or American effort. No, they bring an attitude. Bob Kennedy, the first USA or “European” tern to break 13 minute barrier in the 5k, was one of the first to train with them. He would describe their method as doing nothing but running. They would lie around all day, eat and run. No chores but washing their few clothes in the creek on Saturdays.

It has been said that their culture values being lazy. Their culture allows them to accept “doing nothing” most of the time. But I would disagree. If you know them and have made friends with them, they value socializing a great deal. They will work extremely hard, running 3 times a day and often run through injury and hardship that would make most westerners nauseated on hearing or seeing the gritty details.

The Kenyans I’ve known are great friends. They work very hard at it; at a level most westerners would find exhausting.

I first became good at running in grad school, where I was hanging on academically by the skin of my teeth at Virginia Tech. I was studying my hardest, and running just as hard, putting in 100+ mile weeks for months on end.

Many of my more exclusively athletic focused and more gifted running friends, in college, would put in harder workouts, but couldn’t achieve the volume or consistency that I was able to.

Since I was a math student amongst Phys’ Ed majors, my peers would ask how I could work so hard on my studies. To them math was a major effort.

But on the reverse side, many of my math friends put me to shame in their studies. Almost all in my class had a much better undergrad math curriculum than I did, most had more talent also. But only half the class made it to their second year.

Most, especially those that did not continue to their second year would rarely if ever put forth any physical effort. Many would ask how in the world I could run 100+ miles a week and study. Many of the professors were proud of my track accomplishments, proving by exception a math geek could excel in sports. A few Profs, however, would ridicule my dedication to running and use my borderline grades as evidence that I was not willing to put in the hard work and question my dedication to math and grad school.

There were of course even worse math professors, ones the university did not even trust near students, due to their social difficulties and their unbalanced mental state.

Those professors, however, that I admired once I got to know them did have some physically demanding hobby or pastime. The mental demands of their positions required many restful moments; they let their mind do nothing while their bodies worked hard. These professors not only related well with the students, in my opinion, their published works were much more interesting than the esoteric works, extremely complex but of trivial worth,  of the more imbalanced professors .

As Mr. Sogi suggest the key to winning often is doing nothing. But the best of them have really mastered the art of defining what “nothing” is.

Nigel Davies comments:

Interesting post Russ. Coincidentally I'm currently thinking about these issues myself and am in the midst of a book by the interesting authoress, Chin-Ning Chu entited 'Do Less, Achieve More'. My sense is that our Western 'work ethic' often leads us to need to appear busy, even when activity is likely to be unproductive. And there would seem to be many applications of this same concept in all walks of life.

Michele Pezzutti responds:

"My sense is that our Western 'work ethic' often leads us to need to appear busy, even when activity is likely to be unproductive. "

I agree on your comment. However, some cultures are less prone to it, especially in the north of Europe. In a phase between two project I was managing, activity was quite low as we were completing tails of the old one and waiting for the new one to reach full speed. I did not feel at ease in this situation. But my manager at that time gave me the following advice: "Recover your energy during these periods because soon you'll need a lot of energy again". And he meant it.



I'll not make a prediction if this latest rally in stocks is sustainable or not. I don't know. But it is self-fulfilling. Rising stock prices improve consumer confidence, and more importantly send a signal to CEOs and other executives that maybe there is a light at the end of the tunnel, and maybe that light is not another oncoming train.

CEOs, who despite the appearances, are as human as everyone else, may decide to postpone or at least reduce the speed of job cuts as they start taking cues from the stock market.

Thus this stock market rally (if not followed by a sharp decline) may actually help the economy, at least in the short run.

Nigel Davies replies:

Interesting take on things. Optimism is usually associated with the likelihood of a fall, the logic being that 'everyone has already bought'. But maybe there's a difference between new optimism and old optimism.



 A chess game usually features a number of phases with many mistakes appearing when the 'crisis' has passed. So it was interesting to find the following paper discussing what appears to be the same effect in air traffic controllers. I've also heard that for drivers most accidents happen a mile from home.

Simply being aware of this effect should help because you can 'force yourself' to be more vigilant. But this may also introduce issues such as health and energy levels - the more tired someone is the harder it will be.

"The analysis of the incidents suggested that they were happening via what may be called ‘layered situation awareness’. Layered situation awareness relates to the need to handle significant traffic and their demands, against a background of other traffic. The controller, in order to deliver high capacity and a quality service, focuses on traffic that has short term demands, e.g. a need to climb or descend, or to be at a certain lower sector exit flight level, yet wanting to remain at a cruising altitude as long as possible. The controller therefore (mentally) suppresses or (in the extreme case) ‘filters out’ not only unassumed aircraft (traffic no longer under his or her command), but also certain assumed aircraft that are relatively ‘invariant’ in their passage across the sector (e.g. they are staying at cruise level). These aircraft are akin to ‘blind spots’ – they are not seen. This approach to controlling traffic is borne from a proactive approach which is continually looking ahead, using a more complex strategy perhaps, than in lower workload air traffic control centres. This more complex approach which is partly proactive and partly opportunistic, and is focused on giving a good service to aircraft, means the controller is thinking ahead much of the time, rather than focusing exactly on what is on the radar screen at the time. This theory could explain the incidents at busy and medium times. However, in order to explain the incidents that occurred at non-busy times, it needed to be expanded. The first additional aspect was that this way of working would carry over into low and/or medium workload times after a busy period, when the vigilance ‘resources’ of the controller are lower or even depleted. Therefore, it is suggested that this filtering or suppression process becomes ‘second nature’, and so is more likely to continue to operate when the controller is tired or the normal required vigilance level drops (and the controller is ‘under-stimulated’). It could also operate when the controller is less experienced, and has not yet had what may be called a ‘correctional’ incident that stops controllers from going too far when being ‘proactive’."

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