This is an absolutely brilliant interview that is full of insights for the market. The interviewee is one of the pilots aboard the Qantas Airbus A380 last month that had an extremely serious uncontained engine explosion shortly after take-off.

In the interview they cover - inter alia - such things as

- The importance of checklists
- Dealing with contradicting signals
- Over-riding systematic considerations in favour of discretionary controls
- Keeping your head during a major catastrophe which constantly shifts its dynamics and has a lot of what we might call negative gamma…rapidly developing, interacting, non-linear issues that can rapidly move beyond your ability to keep up with them
- The importance of training and professionalism
- The importance of excess redundancy and robustness
- The importance of improvisation - and the ability to keep a clear enough head in a panic to ensure your creativity can be brought to bear on the problem.
- Power of teamwork.

Best part are the pictures of the cockpit showing the checklists and procedures they are working through.

As it turns out, this incident was very much more serious than the media ever picked up on. What an amazing story. I'm sure all will benefit greatly from reading this. For myself, I will be referring to this interview many times. A banquet for a lifetime.

Hope it benefits you all as much as it did me. Also hoping Mr. Tucker weighs in with some insights!

Chris Tucker writes:

Thanks Nick, a nice summary of some of the lessons available from this.

I would add the importance of prioritizing. As Captain Evans points out in the interview, one of the golden rules of aviation is "Aviate, Navigate, Communicate - in that order". This is drilled into every pilots head from their first day of ground school. Keeping the aircraft in a stable flight path is the number one priority, dealing with malfunctions is secondary.

Another aspect of this incident is the importance of a thorough working knowledge of your systems. Today's airliners are complex systems in the extreme. It is fortunate that, according to the New York Times.

The pilot in command, Richard de Crespigny, spent the last two years researching the airplane and its engines for a book, according to Richard Woodward, a safety representative for the international pilots union and a Qantas pilot who says he has spoken to the crew of Flight 32. "His technical knowledge of the airplane is very deep," Mr. Woodward said.

Deep knowledge of your systems is what guides you when you need to decide what to pay attention to and what to disregard.

Another aspect of this incident which it shares with the Hudson River Miracle , in addition to having some of the most experienced pilots in the airline at the controls, is the preponderance of good fortune (after the initial really bad stroke of luck). To consider: It was daylight and the weather was amenable with clear skies. This is huge. Had it simply been raining, it is not clear that the aircraft would have been able to stop safely within the length of the available runway. The fact that the engine failure was not contained is disturbing. (see the Rolls-Royce Trent 900 engine in a blade off containment test at time 1:52 in this video )

An uncontained engine failure such as the one experienced by Qantas flight 32, although it caused tremendous damage, did not cause immediate catastrophic damage to the airframe or flight control systems. This is either a testament to the robustness of the aircraft or blind luck, probably a little of both. Things could have been much, much worse, as in the United 232 accident in Sioux City, Iowa.

In the end, Captain Evans remarks that it all comes down to common sense and airmanship. Flying is a job that inspires passion. I know very few pilots that are not totally in love with what they do; their dedication to their craft and willingness to never stop learning is a result of this and it is what keeps you and I safe when we entrust ourselves to their care.



 Trend is the basis of profits; no trend, no profits.

Trend is a function of time. 3-5 hours does not allow for trend moves of any real magnitude; day traders play with a stacked deck. The dream of daytrading is in fact a nightmare for most everyone. It can be done, but not for massive profits.

Nick White writes:

There is an excellent discussion of the dynamics of this point in the gentleman from Amioun's first book.

I quote / summarize / paraphrase at length:

Take a regular dentist. A priori, we know he is an excellent investor and has an expected annual return of 15% over t-bills with a vol of 10%. Dentist builds a trading room in his attic, deciding to spend every day watching the market and drink cappuccino. He buys a bloomberg and lots of expensive PC's to automate his trading etc etc. His 15% return with 10% vol per yr translates to a 93% probability of success in a given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second. OVER THE VERY NARROW TIME INCREMENT, THE OBSERVATION WILL REVEAL CLOSE TO NOTHING,. Yet the dentist's heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows red on his screen.At the end of each day, the dentist is knackered and emotionally drained Minute by minute examination shows that each day (given 8hrs / day) he will have 241 pleasurable minutes against 239 unpleasant ones. These amount to 60,688 and 60721 per year. Given that an unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large defecit when EXAMINING HIS PERFORMANCE AT HIGH FREQUENCY. In contradistinction, imagine the situation where the dentist examines his portfolio only upon receiving the monthly account from the brokerage house….67% of the months will be positive, he gets only four negative pangs of pain per year, and eight uplifting ones. THe efffect is magnified at the annual level where, for the next 19/20 years, he will have a pleasant experience looking at his annual statements.
Scale Probability
1yr 93%

1 qtr 77%

1 mth 67%

1 day 54%

1 hr

1 minute

1 second

The net net of all this is as follows:

If we look at the ratio of noise to non-noise then you get the following. Over one year we gets .7 parts noise for every part of performance. Over one month we get 2.32 parts noise per part of performance Over one hour, 30 parts noise for every part performance Over one second. 1796 parts noise per part of performance. Therefore:

Over short time increments, one observes the variability of the portfolio, not the returns…you just see variance and little else. This is emotionally difficult to parse…even though at any moment you see a combination of both variance and return, your brain can't tell the difference. This explains the burn-out rate amongst people who constantly expose themselves to randomness (especially given greater effect of negative experiences than positive experiences).

Kim Zussman writes: 

The analysis is flawed:

1. A regular dentist should not day trade because of opportunity cost and squandering what he paid for his profession's barrier to entry
2. One can only know their returns ex post. If you could know them ex ante there would be no psychological issues - fear comes from uncertainty.
3. Irregular dentists are another story

Rocky Humbert writes:

Kim writes: "If you could know them ex ante there would be no psychological issues– fear comes from uncertainty."

This is not correct.

Fear is a pre-wired response in most people, and can have little to do with the rational analysis of a situation or uncertainty.

Example 1: While waiting to mount an extreme amusement park ride (roller coaster etc), the symptoms of fear (sweating, elevated pulse, etc.) are a genuine physiological response regardless of the fact that the odds of injury on the ride are miniscule.

Example 2: If you are engrossed while watching a horror movie, your limbic system kicks in … just as if you were being chased by the Blair Witch.

Example 3: Phobias are real, and irrational. A person who is afraid of flying is not interested in the fact that his plane will almost certainly not crash. Yet, people are not afraid of driving to work — even though the odds of dying during a commute are much higher than on a cross-country flight.

The emotional fear/greed response to P&L mark-to-market are real– and I believe genetically pre-disposed. They are analogous to phobias and obsessive-compulsive disorders. Hence, I believe Nick's post about timeframes is extraordinarly profound and accurate.



As far as I have ever been able to ascertain, Larry Williams was the first to attempt to apply the Kelly Criterion to outright position trading, and the first to openly discuss it. His pursuit in this regard not only was my initial immersion to the ideas, but he funded those attempts. Whatever I've uncovered along the way is a product of that — Larry's unquenchable curiosity, fearlessness regarding risk, and willingness to fund pursuits others would never touch.

A couple of points further in the post worth mentioning here because I think the other interested members deserve to have light shed on some misconceptions, some of which are a little dangerous to ascribe to, but are widely held.

"One "plays" forever, or practically forever."

But no one does and no one can, and it is this very notion of there being a finite "horizon," that changes not only the calculation of a growth optimal fraction, but every other metric related to it, giving rise to an entirely new discipline in and of itself.

"If one is somewhat risk averse, one can establish a half Kelly criterion, essentially betting half one's full Kelly bet. This results in a lower probability of one's bankroll halving."

But why "half?" Why this arbitrary number? (Or any other arbitrary dilution for that matter?) Remember, we're dealing with a function that has an optimal point, implying a curve, and it is the nature of this curve that is important to us. Being at different points on the curve has vastly different implications to us. Further, the various and important watershed points almost all are a function of that "horizon" mentioned earlier, i.e. the points migrate about this curve as a function of that horizon. Advocates of a "Half Kelly," or other arbitrary point along this chronomorphic curve (with respect to the horizon and events transpired) are seemingly unaware of the implications of their arbitrarily-chosen points.

"The criterion is to maximize the expected value of the logarithm of one's bankroll."

Yes, that is the Kelly Criterion which, in trading, does NOT result in the growth optimal fraction but a far more aggressive (and dangerous, without growth-commensurate benefit) number. No one seems to understand this.. The number returned in determining the value that satisfies the Kelly Criterion can be converted into a growth optimal number (which I call the optimal fraction. or optimal f) but in and of itself, the value that satisfies the Kelly Criterion is NOT the growth optimal fraction in trading. Incidentally, the so-called Kelly Formulas (put forth by Thorp I believe, and market applications attempted by Larry Williams in the mid-1980s) do NOT satisfy the Kelly Criterion in trading applications, but DO in gambling ones (that is, in trading applications they will not yield the same results as the value which satisfies the Kelly Criterion. The Kelly Formulas do, for dual-outcome situations, return the growth optimal fraction). For more on this I can only refer those interested to the most recent Journal of the International Federation of Technical Analysts 11 (available at admin at ifta dot org) or the 2-day course on Risk-Opportunity Analysis I am having in Tampa Nov 13 & 14 see

"The biggest issue of application is that one makes many assumptions about statistical distributions, correlations, returns, etc. that are all wrong."

I agree. In a strange, ironic twist to my modest participation to this story, it was (again, but some decades later) Larry Williams (rather recent) insistence of a way to apply what I know of growth maximization in a robust way. As a result of the pollenization of these ideas by Larry, I can state unequivocally that there are clear, simple, mathematical solutions to these impediments — in short, if someone wishes to apply a growth optimal approach to their future trading, these impediments ARE readily surmountable. But be certain your criterion is growth optimality, and be sure you really want to get into the cage and fight the gorilla. Most just want to sit and watch Dancing with the Stars.

Nick White comments:

Dancing with the stars….brilliant and well said.

We're all fortunate beneficiaries of Mr. Vince's investigations into the intricacies of these issues.

Phil McDonnell writes:

Kelly originally wrote his paper based on race track examples with binary outcome. You won or lost with assumed probabilities and you knew the wager size and payoff. So strictly speaking his formula only applies to wagers with two outcomes. Even a blackjack hand has at least five possible outcomes (win, lose, blackjack, double down, split) and not just two so strictly speaking Kelly's formula does not apply. Some people have erroneously tried to modify the binary Kelly formula by using average win size and average loss size to compute. All such formulas are dead wrong. The reason is that, in general, the average log does not equal the log of the average.

As Larry Williams pointed out most people do not feel comfortable using the optimum log approach even if the math is done correctly. I believe there is a simple reason for this. Most people do not have a simple logarithmic utility function. Rather they seek to maximize ln( ln w), where w is wealth. This is an iterated log function and results in a much more conservative ride. I talk about this distinction toward the end of my book. Ralph Vince also has written extensively on this subject using his term optimal f.

There is another issue with simply maximizing returns and that is it may not really take into account risk in a proper manner. It is true that the log function weights the largest loss the most in a non-linear manner and reduces the weights of gains so that the largest gains are weighted sub-linearly. But that may still not be enough to satisfy one's real risk aversion. That is part of my argument for the iterated log form but it may be that an explicit metric such as standard deviation is still needed.

Larry Williams writes:

Optimal or Maximum Wealth (possible gain) only comes with Maximum Risk; therein lies the problem. Not loosing…risk…is more important than gain in the art of speculation business.

Chris Cooper writes:

More important, as far as my practical experience goes, is that one's estimate of the edge is always subject to uncertainty. The reasons have been discussed on this list before, but certainly include changing regimes, limited history for the models, curve fitting, flexionic machinations, scaling nonlinearity, etc. I relied on the Kelly formula extensively in the mid-'70s when gambling, and uncertainty in your edge was no less important then. The problem arises because overestimating your edge is so destructive to your terminal wealth.

It might be interesting academically to consider an approach, such as Bayesian, where your estimate of the edge is not stationary, but in fact must decrease when you hit a losing streak.

James Arveson writes:

I am a newbie on this site, but I can assure y'all that any finite amounts of outcomes can easily be handled by maximizing the expected value of the logarithm of one's fortune. I have also executed these theoretical outcomes for many years in AC and LV in BJ, and yes, in Bethlehem, PA in Texas Hold 'Em. See Mathematics of Poker for a better exposition of these issues than I could ever present.

Remember that each bet is a single bet, and one can bet forever. Leo Breiman has actually proved that (in the most general cases) that this approach DOMINATES all other strategies.

Now, IMHO, this approach is irrelevant to the market. NO ONE can get all the statistical assumptions correct-statistical distribution, EV, correlation, return, s.d., etc.

Have fun until we get to the next level. Same goes for Markowitz. Check out I have no piece of their puzzle but wish I did (I might be able to get a write-off ski trip to Lake Tahoe where they are located).

Actualizing all of this crap may be the next Nobel Prize in Econ, but it will probably not help schlepers make money in the markets.

Ralph Vince replies:


Pursuing awards is for schlepers like Krugman or other academic dweebs –it's an award voted upon by dweebs for dweebs, and its pursuit bridles and constrains the mind (as *any* political pursuit will. Usually, the truth lies with things that - people off). To-wit, the lack of challenge to the notion that Kelly presents on p925 in the conclusion of his now-famous paper wherein he asserts that geometric growth is maximized by the gambler betting a fraction such that "at every bet he maximizes the the expected value of the logarithm of his capital."

This is accepted by the gambling community, and, by extension (falsely, mistakenly) accepted by the trading community. HOWEVER, a critical analysis of this notion reveals that it does NOT result in the growth optimal fraction, but rather in a multiplier of one's account to risk (the two are different indeed, the latter being less than or equal to the former, resulting often in over-wagering). In fact, the multiplier on one's stake equals the optimal fraction to risk only in certain, specific instances which manifest in gambling, but are rare still in trading (e.g. only on long positions, etc.). I would gladly go into this in depth put I cannot publicly do so as the paper on this has been publish in a current issue of a journal, and I have agreed to refer those interested to the article instead. The upshot is, that the Kelly Criterion, as specified above, is not what Kelly and others thought it was except in the special case I just mentioned — it is NOT the growth-optimal fraction, but something different, equal to the growth-optimal fraction only in the special case — a case that manifests in gambling with ubiquity, and oddly, in trading very rarely.

Again, the gambling community has accepted it for reasons mentioned –because it does give you the same answer for the optimal fraction to bet as the formulations for the optimal fraction in the gambling situations. But just because it gives you he same answer as the optimal fraction in special situations does not mean it is the formulation for the optimal fraction –it isn't.

Secondly, even the "optimal fraction"it is never optimal. Suppose you are playing a game with a 50% probability and odds of 2 to 1. Your optimal fraction is .25 (if you were to play forever). However, after the first pay, the phone rings, it;s your wife, and she informs you of an emergency and you have to bolt the game (with your winnings from the one play, make you a popular guy). If you knoew beforehand you were going to only play for 1 play, you should have bet 100% of your stake to maximize your gain. If the call came after two plays in this game, you should have bet .5.

Tomorrow, you come back to this game — and you bet .25, reconciling yourself that yesterday you bet .25. (so….the game possesses memory?)

Wait, it gets worse in trading, where we see that each individual bet is, in fact, NOT a bet. Let's say you trade only XYZ stock, and you put on 300 shares. Let's say you have a stop below your buy price but it;s a different level for each of 100 shares, so you have three stops below the proce for 100 shares each at different levels. Now, let's say onyl the closest stop, for 100 shares, gets hit, resulting in a loss on 100 of the three hundred shares. Weeks later, you sell out 100 shares at a profit, and, a few weeks after that, another 100 shares at a price higher than that.

But these are NOT three separate trades. This is ONE trade, one wager for the purposes of growth-optimal calculations. And the reason is because you are ONLY trading XYZ — there has been NO recalculation of positions to put on until the entire thing has been closed out. IF, on the other hand, you were having other trades throughout the course of your aggregate position in XYZ, then you WOULD consider each of these a separate trade.

Trading is not the same as gambling. There are similarities, but don't make the assumption that because you risk something and gain something that it is the same. There are things which are proxies for truth, that asymptotically appear to be truth, but they are only proxies (such as the Kelly Criterion) as well as the widely-held (in the gambling community, and hence the trading one as well) but incorrect notion that a wager should be assessed based on it's asymptotic mathematical expectation. This too is a mere proxy and an incorrect one that can, in extreme cases, lead one to accept bad wagers and reject favorable ones.

Again, critical thinking has been absent and trumped by the acceptance of industry catechism.

Finally, you speak of SD's and EV (mean-variance is dead incidentally, as dead as dead can be everywhere BUT academia) correlations, and Chris mentions the (valid) problems of assessing the edge in the future and the problem of non-stiationarity.

The solution to growth optimality in the markets, lies in NOT accepting the Kelly Criterion, but instead accepting what IS the growth optimal fraction– because that then reveals (in the simplest of ways!) how to address the problem of non-stationarity in the future and it doesn't require any of these parameters, or even a computer, it's really THAT simple if you want to attempt growth optimality in the future.

Phil McDonnell comments:

Ralph raises a lot of interesting philosophical questions. On some points I disagree, so let me elaborate. For the purposes of this piece I will assume one is entirely risk averse and seeks only to maximize expected wealth on a compounded growth basis.

First he raises the point that there is no guarantee that a game or investment opportunity will continue. Certainly a true statement. However it is also true that there will be a succession of such opportunities available in one's lifetime. Thus some rational basis for choosing bet size each time should include consideration of expected logs of the outcomes.

Philosophically I disagree with Ralph's analysis of bet it all on the last bet. His math is correct, in that it will maximize the expected dollar outcome. But there will always be other bets, so one's lifetime objective should still be to maximize the expected log not simply the arithmetic expected value. I believe Kahneman and Tversky made the same error in their Nobel winning papers.

I have an alternate take on Ralph's argument that it is hard to define a trade because you can put on 300 shares and exit 3 times at different prices, unknowable in advance. Rather than look on each trade as the basic metric one should look on the portfolio as the metric and a basic unit of time as the portfolio re balancing decision point. For example if you invested .25 of your wealth in a trade that doubled you know have .50 of your 1.25 wealth in the trade. That is too much if you want to maintain the .25 ratio so you need to sell .1875 to get back to your optimal ratio. But the simplest way to look at it is to look at the investment portfolio in each time period, be it a day, week or whatever.

One of the reasons the mean covariance model is in disfavor is that it seems to fail when everything hits the fan. In fact the model is incomplete in the sense that EV and COV are stochastic variables and vary over time. (I am implicitly including VAR here.) You need to explicitly include the correlations somehow in order to take into account how an entire portfolio will vary together. Using the formulas for optimal bet size on a trade level will always lead to serious over trading if there are multiple trades put on at the same time except in the case of a negative correlation between the trades. So it is misleading to calculate an optimal trade size for one system or one trade without consideration of any others that might be on at the same time. At best it is a dangerous upper bound for any single trade size. But it will almost always be an estimate too high. Optimization of expected log of wealth can only be done at the portfolio level.

Ralph Vince responds:


I am not raising ANY "philosophical questions." Just because people may have to think about them doesn't make them philosophical questions as opposed to facts:

1. The value that satisfies the Kelly Criterion is NOT the (growth) optimal fraction of ones stake to risk (although, in special circumstances which we find ubiquitously in gambling and not in trading, it is an equivalent value to the value that IS the optimal fraction). And the pervasive mistake by those attempting growth maximization in the marketplace of using the Kelly Criterion result puts then OVER exposed, to their unwitting peril. They are NOT growth optimal. In fact, the value that satisfies the Kelly Criterion NEVER returns the growth optimal fraction. This was a mistake on the part of Kelly and Shannon. The very fact that it is still accepted by others is testimony to the absence of critical thinking in this matter.

2. Further, what IS the growth optimal fraction is a function of the horizon of the game — and all games have a horizon, including the game of evolution on earth. Further, all metrics, including the analysis of drawdowns (including VAR where a horizon of 1 is implicit), even the analysis of whether a wager should be accepted or not, are a function of horizon. Disregarding the horizon leads us to incorrect conclusions at every turn in risk-opportunity analysis. In fact, it is the necessary introduction of "horizon" that gives rise to this entire burgeoning discipline.

3. Once we accept points 1 and 2 above, the obvious solution to solving for the non-stationarity of the distribution of outcomes we are dealing with becomes obvious. Growth-maximization, unlike attempts at it in the past, now CAN be performed with informed assessments of what the best growth optimal fraction value to use in the future will be.



 This article on income mobility will put in perspective the malaise affecting our economy. It's the 40 % from each of the lower 2 quintiles who moves to the top 2 quintile that has made us beautiful and created the jobs and responded to the past incentives, and dolorously "prefers not to" create jobs and value now.

Australian Nick White comments: 

This is a great country. Being back here the last few weeks just reinforces to me how lucky America is– even if you're in a perceived funk right now. This is the country where anything can get done…that's not the case in any other western nation. You have freedoms that you take for granted every day (even post legislative amendments that may have eroded them more than trivially). You have every type of geography and lifestyle. You have 36 different choices of one brand of orange juice fer crissakes! (which you can drink while watching one of thousands of tv channels).

I don't know much, but I know that if America continues to focus on the the things that got them to here– without trying to reinvent the wheel– you will all be just fine. The only danger I see is increasing reliance on form rather than substance– but this is a malaise of the world in general, not just the US. 

Rudolf Hauser writes:

This data on income mobility does not give us a complete picture. Large gains or losses from realized capital gains/losses, special bonuses payments, decisions to take long breaks from work, etc. can all influence results for any one year. One would also expect income from most careers to advance with experience and age. What would be interesting to see but probably very difficult data to obtain would be an average of five years of data say at age 50 with those relative income positions of those households income compared with that in the same period in the lives of their parents. I suspect that there would be a good deal of upward income mobility demonstrated by such an analysis, but it would nonetheless be most interesting to have that evidence.

Russ Sears writes:

Isn't this the premise of the sitcom "The Big Bang Theory"?

A group of nerdy physicists meet their neighbor, a beautiful blond girl waiting tables at the cheesecake shop… but even she is hoping to become an actress.

But you miss the point– from the Will Smiths to the nerds in physics to the marathon runners to the Saints QB, they are all incredibly talented, even the WS geeks, not just the WS geeks.

And as someone seen how letting a small business owners put the money back into a sport can revitalize: it can change how everybody developed talent. In 1992 The US marathon trials were a joke, but these guys changed it.

The world will never know the talents that were not developed for lack of a few dollars, but I have seen first hand how thin the pie can be sliced at the top, and how a few centimeters thicker can change everything. 

Jordan Neuman comments:

It is interesting that you mention the varieties of orange juice. I just read The Paradox of Choice which argues that our lives would be better if we did not have so many choices. The varieties of grocery items was the author's starting point.

It would not matter unless such ideas had support in this Administration. The references to health insurance in the book are illustrative. And I found the interview with the author in the afterword absolutely chilling. This professor was sure he and his "expert" friends knew better.

Larry Williams writes:

Living in the US Virgin Islands means giving up many choices in foods, clothes, cars, etc. I have found that a wonderful thing; it causes one to focus on what is really desired (that can be ordered from off island). It makes for a simpler life style and turns ones attention from man made consumables to the ocean, the trade winds, local markets and such.

Sam Marx comments:

I remember one of the escaped English spies then living in Moscow, when asked what he missed most about England, he replied Lea & Perrins Steak Sauce.



The book The Blank Swan: The End of Probability contains some fascinating abstractions. It was very thought provoking and some good non-linear ways of thinking within. I liked it, although note that it has a continental philosophical flavor which may not be everyone's particular brand of vodka.



Paul hoganEssential viewing for everyone who loves individualism and having a good crack at the Service for taking (in this case, literally) 100% of lifetime earnings.

part 1 (esp from 5:01 to 6:15)

part 2

This is very different from how all of you will remember him from his acting exploits of the past. Actually, this is probably as close to true Australian spirit as you'll ever see….far more than the manufactured stuff he pumped out in those awful movies.





"'There's nothing to take us higher so we're continuing to go lower,' said Dan Greenhaus , chief economic strategist at Miller, Tabak and Co."


Nick White writes:

That's bad, but the all time award had to go to the guy some years ago who made the prescient and wise call: "Well, Maria, the market went down today because there were more sellers than buyers…."

Full marks, sir.



jail for Clemens"Joe Maloof, who owns a casino said this about athletes: "they always think they can win. The great ones are the worst. It's as if they really think that odds don't apply to them." (relating to Clemens going to jail).

Russ Sears comments: 

From what I have seen of steroid use in athletes, the surest sign displayed for all to see, is the change of cockiness at the start of there use. It goes from stubborn determination needed to succeed at those levels, to self assured immortality/indestructibleness. This I believe is why steroid use only gives a athlete a temporary boost if he/she has already reached their peak without them.

This omnipotence includes superior intellect, especially over drug experts and authorities, that borders on the teenager's omniscience over authoritative parents. They have experienced something clearly beyond science or the laws possible grasp.

If libertarian views on drugs use is to gain anything but derision from the masses, it must address these self delusions drugs inflict, Both on an educational campaign on these self delusions. And make clear that while we may have some similar end goals towards freedom. The means to get this freedom would still place a heavy personal burden on these poor delusional souls. But perhaps a more enlightened view of their self assured self destruction, and a more productive repayment program for the heavy social and economic burden their deluded actions places on all of us. I hate to see Clemens go to jail, but he certainly owes us all a big debt for robbing the integrity of the game.

Nick White writes:

I would advise anyone interested in this topic to look at the before and after interviews of almost any professional cyclist convicted of doping offenses…take your pick of nation or language…there are hundreds….all from the sharp-end of the knife, not "also-rans".

I would also present - as exhibit A - the cocksure attitude of one particular, multi TdF winning "hero". I would advocate the reading of affidavits from staff, team-mates and others in forming your judgments.

Right now, I'll pull out this card, and wait for the ensuing vitriol.

My own two cents? The popular attitudes required of professional athletes is akin to being short gamma in a fast market. I would say for any individual involved in an activity where the best outcome that can happen is the keeping of the sold premium, there is going to be an element of delusion just to keep "sane" while the position is on….sports, business, life, politics, personal goals or philosophies. 

Russ Sears adds:

If innocence or guilt was really the question, then drug use in sports would accept evidence like any other crime. But it is assumed not just innocent until proven guilty, but that anybody that witnesses the crime or has knowledge of the crime has turned to the other teams, is jealous or simply got bought off…at least this is what the sports leagues/teams would have you to believe. See Nick's post. Now you have a crime that can not be reported, because you are assumed the guilty party more than the drug cheat.

Now if they really wanted to clear drug use out of baseball, they could enact a system like college's uses to keep their players from accepting a dime. If a team's player is caught breaking the rules, now or from the past, the whole team lose major league status for a year, and their players contracts must be honored but the players can choose to be free agent. Likewise for Olympic sports. In track it was well known that the Chinese women had the best runners by times, in the late 90's, but they were cheating and therefore did not get invited to real track meets. But if the track team would have been banned for a Olympics you can beat, the Chinese would have taken care of this before they were banned.

But as it is drug testing is the only way to "prove" guilt, despite its clear drawbacks.

If this type of system, giving punitive punishment to the whole team where the team really wanted to eliminate the users were in place, then your testing would be invaluable.



An organ transplantI was engaged in a discussion with a statist, collectivist friend of mine about the merits of organ transplant, organ donation, state ownership, and government regulations of our bodies. He was of the belief that the government does not own our bodies, and I disagreed. My main argument was that if we are not allowed to sell our organs for profit, to be transplanted, we don't own them. My hypothesis is that if you really own something, you should be allowed to sell it any time for any reason, like any other personal property. Since there are laws in this country forbidding the sale of organs, especially for profit, we really don't own our bodies.

If we were allowed to legally sell our organs, the supply of available organs would increase, costs would come down and the lives saved would increase. Government regulation of the "organ market" has distorted the market, made for lengthy waiting lists, and increased the costs in regulation and transport.

I made a few other points regarding the illegality of suicide and the taking of drugs being a control by the state over our bodies, but my statist friend didn't buy it. Although he was unable to give a rational response to my hypothesis, he left feeling that he had won the argument. I wonder what type of state would have to exist in which we, not the state, would own our bodies. Does such a state exist in today's world? Do we own our bodies, or do we merely rent them?

Rocky Humbert writes:

If your main argument was that if we are not allowed to sell our organs for profit, we don't own them, it's not clear that the sine qua non which defines "ownership" is the unfettered ability to sell that item for profit, as it ignores ethics and regulation.

For example, the Government imposes regulations on markets (for better or worse). I can own certain ivory and switch blade knives, but I cannot "sell for profit" ivory and switch blades. But as possession is "9/10th of the law," my inability to sell switchblades and ivory does not mean that I don't own my ivory and switchblades.

Another example is that I can own a dog or cat, but it is generally unlawful to starve and torture the pets which I own. Also, I am not permitted to sell a "sick" cow to a slaughterhouse for profit. But there's no question that I own the dog, cat and cow.

And of course, the abortion/murder/etc discussion illustrates the profit question too. A woman may "sell" her eggs or body (as a surrogate mother), but if she is pregnant, the fetus at some point is considered a separate human being, and the discussion goes down a different path– where the mother's rights of ownership conflicts with the fetus' rights of self-ownership… etc.

A final example is conscription and coercion. You can be threatened by a mugger to give up your wallet. But that doesn't mean you didn't "own" the wallet before you handed it over. Likewise, when the Government calls you up to serve in the Army….

Lastly, you use the word "profit" in a strange way. In order to have a profit, one needs to have a cost basis. What is the cost of a kidney for sale? How does he know that he's not selling a kidney at a loss (instead of at a profit)? How does one account for the investment and depreciation?

Obviously, traditional accounting doesn't work too well in this genre.

Nick White comments:

Lord PannickI remember in law school learning that you can't patent your genes or "own" property in them, but a drug company can patent/ own a derivation of your DNA / biological material if you sign some obscure consent during some procedure that allows your DNA to be used in research. Inevitably they discover some miracle cure for xyz that they then Venter into billions whilst you continue to struggle with a terminal case of athlete's foot or whatever you originally went to be treated for.

The law is a twisted, inconsistent creature and, like any human creation, will be imperfect no matter how we decide it. For more, I would recommend the work of some legal philosophers who wrestle(d) with such things– amongst them Lon Fuller, HLA Hart and, in our day, Richard Posner. Bastiat will be familiar to most here, but he also had much to say on property rights etc etc.

Slight diversion, but best legal columnist and, I believe, one of the very sharpest legal minds in the world today is Lord Pannick, QC who writes for The Times of London…unfortunately, Uncle Rupert now charges to access his stuff, but you can find access to some of his court arguments by following links here and his wiki profile here. In terms of literal "human rights" and state authority over them, Pannick has argued it all.

And, of course, one of the best reasoned arguments for state ownership of anything (though, in the specific it deals with tax) can be found here– "Tax Avoidance in Practice" by David Goldberg, QC. Generous hat-tip to Nozick, John Rawls et al also necessary.

Victor Niederhoffer comments:

Since the purpose of life is to do good for others, according to the
idea that has the world in its grip, a personage of superior
sensibilities far above our own selfish volitions must make that

David Hillman writes:

 I suppose some might oppose Jeff's hypothesis arguing that freedom to buy/sell one's body parts would lead to wholesale profiteering by individuals, families, persons of influence, predatory brokerages, etc. but, if we should not be free to sell organs/parts privately or on some exchange, why, then, are we encouraged to give blood and why can anyone pop into the local bloodbank three times a week and 'donate' plasma for $20-$30 a visit? I suppose it has something to do with plasma being regenerated, as well as societal mores and fear of things that go bump in the night, of Igor and of the ghoulishness of sectioning the body.

The 'personage of superior sensibilities' seems to dictate that personal profit motive is out, and 'in the name of science' is the threshold of acceptability. But given the present state of the law, as Nick points out, one wonders if the state isn't acting less as an owner of our body parts than it is as an enabler of corporate profiteering from of same….'in the name of science', of course….?

In regard to the question at hand, may I suggest reading The Immortal Life of Henrietta Lacks, Rebecca Skloot, Crown, 2010.

From Skloot's website:

Her name was Henrietta Lacks, but scientists know her as HeLa. She was a poor Southern tobacco farmer who worked the same land as her slave ancestors, yet her cells-taken without her knowledge-became one of the most important tools in medicine. The first "immortal" human cells grown in culture, they are still alive today, though she has been dead for more than sixty years. If you could pile all HeLa cells ever grown onto a scale, they'd weigh more than 50 million metric tons-as much as a hundred Empire State Buildings. HeLa cells were vital for developing the polio vaccine; uncovered secrets of cancer, viruses, and the effects of the atom bomb; helped lead to important advances like in vitro fertilization, cloning, and gene mapping; and have been bought and sold by the billions."Henrietta's family did not learn of her "immortality" until more than twenty years after her death, when scientists investigating HeLa began using her husband and children in research without informed consent. And though the cells had launched a multimillion-dollar industry that sells human biological materials, her family never saw any of the profits. As Rebecca Skloot so brilliantly shows, the story of the Lacks family-past and present-is inextricably connected to the dark history of experimentation on African Americans, the birth of bioethics, and the legal battles over whether we control the stuff we are made of.

If her mother was so important to medicine, why couldn't her children afford health insurance?

free at Google Books.

Wiki reference.

Ryan Bickley adds:

I am actually reading The Immortal Life of Henrietta Lacks as required reading for my freshman year at Johns Hopkins. I'm about halfway through and second David Hillman's recommendation. It's a very well told story with an engaging plot that reads almost like a novel, except that it's completely true. It gives a good history of how cell research has evolved over the years and all of the problems that scientists and patients have faced over consent, the owning of tissues/cells, and the profits of this research. 

Femi Adebajo asks:

Let's look at those climes where there is a thriving underground market in organs then. India comes to mind. How have these forces of demand and supply shaped the market there then? I won't bore you but there were some interesting articles on this subject in the British Medical Journal a few years ago on this subject. I can send you references if you'd like them.

I'll just be as keen to hear your thoughts about what the response should be to those who choose to sell essential organs, in the knowledge that their removal will result in their death.



Federer loses to NadalHere are a few tennis notes to myself, following up on a match that I lost 6-0, 6-0 on Friday. Hope springs eternal.

–Whatever the virtues and drawbacks of the backhand slice, I need to have one when I'm in a defensive situation. However, my slices too often end up being either high floaters or direct dispatches to the bottom of the net. In retrospect, I think I need to close up that racquet face. Federer's slice (video on subscription site uses just an ever-so-slightly open face. Tonight I was practicing with a nerf tennis ball in the basement, and that does seem to improve things.

–I have ongoing indecision about whether to try to hit forehands with the Western/semi-Western grip or with a Continental, McEnroe style. The Continental grip seems so relaxed and smooth, with my body motion so in tune with the swing. (See McEnroe vid) My stroke with a western grip too often feels like a flail, and I sometimes frame it. I can't even get a good mental image of what the western forehand "should" feel like. The Continental shot, however, is difficult if the ball is high, and furthermore my coach tells me that it doesn't have as much on it. The Eastern grip is sort of in-between these two alternatives, so it should be a reasonable compromise, but for whatever reason, I tend to hit the ball way too high, and out, with it.

–Sweat! Despite using a sweatband, towels, and brand-name overgrip, my palms was profusely sweaty, which did nothing for my confidence. After the match I bought all the anti-sweat paraphernalia that I could find– the Prince Grip Plus Enhancer, a Gamma Tacky Towel, and a rosin bag. I don't yet have any data on whether these will help.

–The Serve. The serve was problematic. Oh heck, it was awful. The serve is the hardest shot of all. The crazy thing is that the ball is above your head, but you need to hit it with topspin. Often the textbooks say things that can't possibly be correct, such as "Hit the ball at the highest point of your racquet's arc." At the highest point in its arc, the racquet's vertical component of velocity is zero by definition, and so you'd never impart any topspin to the ball if you did that literally. Several times during my tennis life I got to the point of having a good or even very good serve, but if and when I ever stopped playing for even a few weeks I always lost it and had to totally, painfully rediscover it.

Nick White comments:

Two interesting points…it seems grip is foundational to everything. What's the starting grip in the market? Could we call it approach (ie, quant, fundamental, ta etc)

Second point: in the link for Winning Ugly, Google Books also recommends Michel Foucault– an interesting suggestion, though not as oblique as it first seems. I presume this association comes from the foundational premise that if one wishes to improve their game, one must first prove the ball actually exists.

The more frightening recommendation was "Marxism and Psychoanalysis". Either the algorithms need some serious tweaking or the programmers have a sense of humour.

Kevin Depew adds:

I believe your "market grip" is your capital relative to your ability to defend it; hence, the ghetto slang word "grip," what you're holding of value which Dr. Dre, for one, intends to take by "jacking little homies for they grip." But that's just one man's interpretation, obviously. 



The professor's wifeOne wonders if anyone out there saw any activities that bore the badges and emblems of inappropriate behavior out there today so that one can maintain my side of the discourse with Mr. Humbert. One noted a strong weakness in the last minute. Could that be the interference with the advantages of the closing prices of JPM and GOOG announcements from the flexes? Or was it more likely yet another wife (or significant other) of a professor from an ivy league university just using her knowingness for her hedge fund as in the free market reform expenditures they conduited, monopolized and discharged their debts in court thereto? Any help you can give me in this continuing discussion so that I can hold my own with my friendly adversary who apparently sees the best in all his former bosses and their colleagues would be appreciated.

Rocky Humbert states his position:

I am not an adversary of The Chair (friendly or otherwise). I simply question why, if the game is as rigged as he suggests, does he continue to participate– especially when more than 70% of the daily volume is attributable to high-frequency computer-generated algorithmic activity– which by its very nature must be a zero sum game. 

Nigel Davies writes:

I 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 randomised 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.

Nick White responds:

Re: "why bother?"

For myself at least, I would argue that it's a bit like in football.

A running back tries to get through the line and the secondary to make the play and score….most of the time he will get flattened or maybe gain small yardage. Every now and then he'll get creamed, or worse, fumble it to concede a TD to the other side. But - the opportunity to score comes from trying to find that little crease in the D to break into daylight. And so it is with us.

To know where those creases may open up on a given play, the player needs to study the film, know the schemes, know the players they're up against and the tells those players give out ( I recently watched an "America's Game" NFL film about the Patriots; on the other side of the ball, one of the coaches remarked how much they were looking forward to defending against a particular OL because this linesman gave up, without fail, whether their play was going to be a run or a pass by the stance he took at the line: if he was in a two-point, i think it was for the run, and three-point stance for the pass.)

So, there it is….it can be a tough game to play against the ebb and flow of noise; no one doubts that. But the key seems to be (no matter your trading stripe) to put yourself in the best position to find a crease, know the circumstances under which they are likely to occur– and then nail it for all it's worth.

Rocky Humbert adds:

But extending the metaphor, The Chair seems to be suggesting that (1) the referee is corrupt; (2) the other team's blockers are carrying brass knuckles; (3) the clock runs faster when you have ball possession; and worst of all, the Professor's Wife paid off the laundry guy to not-wash-out the bleach from your jock strap. Shall we still play a game?

(It didn't end so well for Mathew Broderick.)

Nick White writes:

I'm no conspiracy theorist. Maybe there's collusion and coercement. Maybe there isn't. I'll never know. I console myself that if I stick to my plans, I hopefully won't have much reason to care. I can only play my game, and (like you, Chair and others) play it staunchly by the rules.

I'm just pragmatic about the potential for shenanigans where there is a competition and money is the prize. To build in some redundancy into my bold assertions I'll try and give some allowance for 1-3. Four is more problematic…that's just going to hurt.

With the current running of the Tour de France, I'm sure there is much we can learn about systematic cheating and cover-ups.

Bill Rafter adds:

The fix or edge was always so, and is so now, but the markets and players have changed.

Many moons ago when my partner and I were active commodities traders (before they were called futures) we made a lot of money in certain markets. Our favorite venues were eggs, cocoa, bean oil and meal. For some strange reason we had the ability to ascertain the fix, but only in those markets. What interested us what that the egg market was clearly a rigged game, but the bean products seemed to be the essence of fair markets. Also of interest was that we could not get any edge in other obviously fixed markets such as bellies (and a tip of the hat to a certain former and future flexions cattle broker and her signiflexiant other). In the case of eggs we had strong evidence that it was the delivery particulars, and delivery also seemed to have an effect on the other markets we could play favorably. Delivery is very much the bailiwick of those in the know.

Fast-forwarding to today's equity markets we suspect that HFT is having a strong effect. Overall share volume had dropped precipitously from the highs of several years ago. It has recently returned to a decent level. But how much of that recent volume increase/recovery is HFT? If it is, then some part of the activity beyond 1-minute bars (or 5-minute bars) is going to be inefficient. For HFT should make the market more efficient in the shortest run, but ignores the forest for the trees.

We ourselves like the presence of HFT as it tends to give us better executions. And we prefer that the giants (e.g. Giant Squid) play in that shortest time frame. Someone has to take over the specialist functions, and better it be the well-capitalized firms. But anyone trying to compete in that time slot is going to have a lot of competition. And should one of the giants discover an opportunity in which THEY had limited, if any, big player competition, watch out. That is, a giant with the room to run a table most certainly will. And if the giant has a dealer at every table, sooner or later one is going to present such an opportunity. That in theory could have happened under the specialist system, but the specialists were constrained from doing so. No such constraint is in place now. The bailiwick of those in the know at this time is the HFT universe. Expect to be taxed by the bailiff.



canarySome pretty awesome symmetry forming up this last month or so.

Chair commented before that the big down bars often seem to get mirrored by the big upside bars like today.

The other thing I've noticed is what a difference the next week makes. Last week the news stories were all end of the world, even trotting out Prechter. What a joke.

Why is it that a lot of big buying seems to occur at the highs?

As for pilot fish, seems like a big out of place vol bar is a good canary. (Sorry to mix metaphors.)

Nick White comments:

One would note that the sword in Asia has certainly not been sleeping since Friday…Therefore I would argue that such a rise as we saw in the S&P today is simply the US playing catch up with the Asian move from the holiday weekend.

I would also contend that there's a bit of relative catch up yet hanging in the stars.

Sushil Kedia writes:

How would a counter convert the concept of symmetry in prices over any time frames to testable hypotheses? I confess, I continue to have weaknesses in converting ideas to testable hypotheses. So, I will be learning from those who will share.

Pardon kindly if this next question diverts the thread to any other: How do folks like me sharpen our imagination to focus on converting vivid thinking to be able to arrive at testable hypotheses?




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



I re-read the Sun-Tzu on the weekend. I know it is one of the most hackneyed books out there, but I wonder how many have actually read it. It is an extraordinary text, and one with which I feel a great affinity. I singled out a few verses from within which i'll send to you. I love the ideas of formlessness, of having the enemy come to you and making them spend all their force in doing so; that the attacker is vincible, while the defender / passive is invincible. That numbers count for nothing, but strategy with sound tactics is everything and can defeat the largest force. The power that comes from knowing the enemy - and the even greater power that comes from knowing oneself. All very strong stuff.

Ken Drees comments:

I especially like the secret agent dealings that are laced throughout. See "secret agents" in the index for page numbers.



Attached chart of TIP/TLT (Inflation-indexed bond etf / 20Y bond etf) shows recent roll-over in the wrong (deflationary) direction for those seeking easier repayment of debts and waving of flags over tracts of appreciating houses.

OTOH it is a good direction for those seeking more stimulus and associated nest-feathers.

Kim Zussman refines his views:

A friend, Sam Humbert,  pointed out that TIP and TLT differ in duration (~3.7 yr vs ~20). So to better isolate on inflation, here is a chart of TIP/SHY (SHY= 1-3yr Treasury bond ETF).

The recent move for TIP/SHY is up; opposite to TIP/TLT, showing a significant yield-curve-change component is affecting the former chart. I conclude that the market is more concerned recently about inflation at a 3 year horizon.

Rocky Humbert comments:

The current inflation "breakeven" for 5 Year TIPS versus 5 Year T's is 1.56%.

The current inflation "breakeven" for 10 Year TIPS versus 10 Year T's is 1.91%.

This is the least worst measure of of "investor inflation expectations."

It's important to recognize that TIPS funds (and secondary market TIPS) have a variety of complex technical and tax nuances that make apples-to-apples comparisons with straight Treasuries difficult or misleading.

For example, a taxable buyer of seasoned TIPS who experiences deflation followed by inflation can have a strikingly different total return than a buyer of seasoned TIPS who experiences inflation followed by deflation. This path dependency does not occur in regular Treasuries.

And if one is really clever, one can try to understand the WIP etf … which is based on the DB Global ex-US Inflation Linked Index….

Al comments:

I must fight the war against my own ignorance here: What is a "seasoned" TIP?

Rocky Humbert responds:

Asking a question is not a sign of ignorance. It's a sign of wisdom.

A seasoned TIP is both a delicacy at my local steakhouse, and it's an inflation-linked bond that's been trading in the secondary market for a while. The TIP's par amount increases by a CPI factor (when the CPI is positive), and the par amount decreases by a CPI factor (when the CPI is negative).

So, for back-of-the-envelope purposes, if you invest $1mm in a particular TIP bond after it's been through a few years of inflation, and then you hold it through a few years of deflation, it's theoretically possible to lose money even if you hold it to maturity. An analogous extreme example would be if you buy a mortgage-backed security in the secondary market with a 6% coupon and a price of 108 … and the homeowner(s) unexpectedly refinance … and you suddenly get 100 back….losing 8 points.

Easan Katir pleads:

The country has had so many years, decades, of rewarding borrowers and spenders through creeping inflation. How about at least a few years for the ones who have scrimped and saved, are unleveraged and tired of paying more for everything every year for most of one's lifetime. Deflation is wonderful. Everything is on sale.

Nick White writes:

That is, of course, until you lose your job because your employers has gone bankrupt from falling prices…. ;-)  

Stefan Jovanovich comments:

Neither deflation nor inflation is wonderful because both are founded in dishonesties; their prices are not set by ongoing enterprise and competition but by government clipping of the coinage, political favors and the sheriff's auction. Easan exaggerates the rewards gained by the borrowers and spenders here in the Golden State. Most of the people in California who used their houses as ATMs did so because their after-tax incomes never recovered from the bust (unless, of course, they worked for the state or the schools.) There were great frauds committed on mortgage applications and by brokers, appraisers and mortgage lenders; but those were minor costs compared to the major fraud of having the GSEs become one-way hedge funds who agreed with the people chasing housing prices that no one ever lost money buying real estate. (The frauds at the retail level would never have been possible but for the demand from Wall Street. Without the credit bubble there would never have been a housing bubble.)

How about we all try a monetary/tax system that favors neither the borrower nor the lender? Prices would still fall; they always do in competitive markets because the buyers keep their eyes out for ways to get a better deal and the sellers work hard to produce things and services better, cheaper and faster. Nick is right; what makes "deflations" ruinous is not the steady decline in nominal prices that results from constant competition but the collapse that comes from a cascade of credit defaults that reduces commerce to a race to the courthouse.

In 1930 "everybody knew" that the solution to the problem was for the government to bring back the WW I boom by spending money. Mellon tried to argue against such stimulus. He did not say that the solution was to "liquidate, liquidate, liquidate"; what he did tell Hoover was that adding government borrowings to an economy already worried about private credit risks would call the soundness of monetary system itself in question. He was right, of course; that is why Hoover never forgave him and Roosevelt literally persecuted him. Once again, Gresham wins the day; sensible advice, like hard money, is never rewarded in a modern political economy.



Of the reason that was the reason that federer almost lost as cervantes would say is that he was concerned and distracted by the play of his beloved swiss soccer team. What other distractions lead to losses in the market?


Jay Pasch comments:

ringing telephones (never again)
a 3-martini lunch (never again)
one's own imagination regarding what one thinks the market is going to do,
delusion (again and again)

Victor Niederhoffer responds:


Nick White writes:

Beloveds of any kind, one would imagine. Good natured banter amongst one's associates can take mind off the job. I'm coming to see the Chair's wisdom of no noise, no talking, no intra-day distractions. It really does make a difference. However, it seems to me that perhaps there should be some distinction between "on" and "off" modes. When on, full noise / distraction lockdown. When off…well, game on. Like a firestation or military on alert.

Marion Dreyfus comments:

Safety issues

If one is immobilized by concerns about the outside world such as familial well being, adverse weather or unsafe streets, one cannot be free to fully concentrate

Indeed it becomes a juggling act–which concern will prevail?




 One was recently asked, how do you spot a hoodoo when you are in or dangerously close to their presence? I would say that their past record of failures is a good starting point. As is their ability to talk a much better game than they play. Also, their attempt to impress you with the trappings of success, ( a conference call with their five principals is a usual gambit). Not to be disregarded is their locus of operations, often from a ephemerally built recreational area where permanent lodgings and such things as pianos are not availalbe. The inclination to befriend you and flatter you is also a clue. But how can this be quantified, and how can we learn to avoid them? What should you do when you've met a hoodoo? I've always taken to burning my shirts, especially if they've hugged me as they ofen do. Dare I ask the question of whether there are such things as hoodoos or is it a figment of random numbers? No, that would be too mind boggling. But please help with your insights.

Alan Millhone writes:

Some years ago my late father and me were enlisted by Banque Worms to take over a failing condo project in our area.

The developer met us and after I shook his hand I could smell his pungent cologne on my hand for the rest of the day. He had a lady friend assistant who wore a see through dress with precious little underneath if the sunlight caught her profile just right. When I first met him I could see " carpetbagger " across his forehead.

He was a genuine "slicky boy" right out of South of the 38th Parallel.

People like him wear a lot of bling and cheap after shave. Usually have a woman at their side as a distraction.

They are long gone. Our crew finished the job.

Stay vigilant and wide eyed. 

Pitt T. Maner II adds: 

hoodoos at Bryce CanyonFortunately, I associate the word "hoodoos" with the past leader of my university (UF) geology field camp, Professor of Geomorphology, Dr. Robert Lindquist, who was an expert on the formation of hoodoos in the magnificent Bryce Canyon in Utah and knew of the locations of many wonders in the West–original survey markers left by Powell, dinosaur bone and gastrolith graveyards, amazonite on Crystal Peak and ancient lahars in South Park, Co. A geologist's geologist who looked like he had stepped out of the 1800s.

As for the other definition, there was a person who once recommended Enron, Freddie and Fannie, and several other long ago bankrupt companies and who was so consistently wrong for awhile that it was almost uncanny. If one had just done the opposite. It was a good education to lose money at an early age though on hoodoo picks. Better to lose and learn using your own thought processes–at least there is a sliver of hope for improvement. 

Russ Herrold writes:

I might add that to view a person's bookshelves (even ones only in public areas) or even books in the process of being read on a table, or to note the absence of such, in each case provide a window into the mind of that personis to me a 'tell'.

Alston Mabry writes:

To see something clearly, it can be helpful to study its opposite. Recent list discussion included one of my favorite anti-hoodoos, Richard Feynman– intelligence, curiosity, enthusiasm, creativity, generosity, joie de vivre.

Russ Herrold adds: 

This certainly may work for when to exit or what to avoid. My brother also seemed to have a uncanny ability to leave the party, when things were getting hot… too hot… right before the cops came and arrested everyone. His friends started following him. However, the same may not be true with when to start a party. As a kid I remember people would fight for a seat next to me during a math test. If I did not like them I would pull a Goldman synthetic and write down some wrong answers, to be corrected latter in secret. It has been my experience in investing that the surest sign of a Hoodoo is willingness to copy someone elses system or trade and yet have no idea why they should expect it to work. There seems to be floating around hundreds of billions par value of formerly AAA paper that now only worth hundreds of millions that seems to prove that these Hoodoos are extremely common, if not the most common Hoodoo around.

Nick White writes:

Perhaps the most difficult aspect of detecting hoodoo-ery is to discern the difference between the genuine actions of the bona-fide dealer versus the pretense of the hoodoo (who - come to think of it– may well be bonda fide, too, but just cursed. Let's call these poor souls benign hoodoos versus their more malignant bretheren).

I think the sure tell of a malignant hoodoo is that their most effective lies will be those very closest to the truth…yet there lies their very advantage over us, and requires some street smarts to know the difference. Perhaps the foil is to know and experience for ourselves the difference between ambition and aspiration. The Stoics made this sort of distinction to help them in their quest against self-hoodooery: Ambition was vulgar, akin to avarice, full of scheming and accompanied by a very lowbrow, keeping-up-with-the-jones mentality. These sorts of feelings were to be put to death in oneself moment-by-moment through Stoic practice. Aspiration, on the other hand, was considered more noble, civic and had the connotation of dilligence, discipline and a bent toward giving a world-class performance simply for the sake of excellence as a way of life. Therefore, perhaps we might say this kind of vulgar ambition is the giveaway quality of malignant hoodoo-ery? Applying this little rule-of-thumb might constitute the foundation of an early warning system.

However, before any of us jump on the moral high horse and consider themselves "aspriational", the Stoics further stipulated that it required very great self-knowledge to even know the difference between these two values, let alone to declare oneself in one camp or the other. Even then, the Pyrrhic victory was assured– if you felt yourself to be truly humble and aspirational, you were most likely hopelessly ambitious and required greater training to cure the very need to make such statements about oneself.

Jeff Watson adds:

Nick, you made the most erudite explanation of hoodooism I've come across in a long time. One might wish to consider the partial hoodoo which affects 95% of the population. With the exception of a few good trades and the ability to be a good father, I'm a world class hoodoo, among the best. I won.t deny this because that would be a folly, and total lie as I can make money but my personal life is a train-wreck. I won't get into the Faustian aspects of all of this, but it is there. Hoodooism comes in many ways, shapes, and forms and I've seen and done them all. Hoodooism is like the old adage that history doesn't repeat itself but it always rhymes. The hoodoo that the chair describes isn't enough, the one you have to watch out for is the one that makes money on a regular basis, he's the danger.. He might steer you onto something good, but there is always a price to be paid, and the price is not always what you expect and not the currency you wish to pay..

George Parkanyi writes:

This whole notion of hoodoos frankly I find rather uncharitable, and burning one's shirt after a tainted hug smacks far more of superstition than science.

Now not hanging around negative people I understand. Some just wear you down with their negativity, and you do have to cut your losses at some point. But to classify those who have tried and failed into their own undesirable caste is unfair and a vast oversimplification. People run into difficulty for many reasons– failed relationships, health problems, sometimes just honest mistakes. My experience has been that people have far more to offer than what appears on the surface– regardless of their circumstances.

I wander past homeless people– ostensibly life's greatest "losers"– sometimes as I go to work, and when I really think about, I'm awestruck at how they have managed to survive all this long– with absolutely nothing, through harsh winter conditions. How do they do it? Clearly, they have skills that I don't. One time I gave a not only homeless but also legless man $10. He didn't ask for it. I just walked over and gave it to him. Here he was on the front lines at the very edge of humanity, representing on my behalf one of the worst possible circumstances that I could even imagine for myself and somehow I was drawn to him. When I gave him the money, he beamed at me with this smile of pure joy, looked me straight in the eye, and cried "God bless you!" To this day I will never forget that blessing, because at that moment there was a seismic shift– I actually physically felt it– in my understanding.

In the lands of the dispossessed, I don't see hoo-doos at all. I see potential teachers.

As for people who befriend you only because they want something from you, the best I think you can do is make your own decisions on to what extent and level you wish to engage. If you enjoy their company or there is something about them that you like, go with it, but don't take risks that would seriously jeapordize your business, family, and other relationships. Not everyone is genuine, yet not everyone's on the make either– and some people are absolute gems. To be completely distrustful will cut off a lot of wonderful experiences. To expect too much of people or to be overly trusting will set you up for disappointment, or worse.

It's like trading really. If you diversify your relationships you have less risk and less volatility. If you concentrate your relationships, you have more risk and more volatility, but perhaps a bigger payoff in the intensity of love and friendship. You have to figure out the right mix for you. The interesting thing about relationships is that that while you're investing in others, they're also investing in you. The more relationship value you create, the more relationship value you (and others) will also accrue. I can't quantify it, but I think there is a real multiplier at work there.

Last point. If you're not confident enough to engage or deal with a "hoo-doo" without fearing harm to yourself, then perhaps you should worry less about the "hoo-doo" and examine your own fears. What difference should it make to you if have a conversation, dinner, or even a business deal with such a person (however defined)? In what sense would that make you a lesser person or cause you harm? It may or may not, but I think its a good question to ask.


Jeff Watson comments:

George, it would behoove you to read up exactly a hoodoo is before writing such an elegant, misguided essay. The essay was great, almost fantastic, but missed the point. I can say this because I'm a hoodoo and proud to admit it. Not all hoodoos lose money in the market and in life and divorce. Some lose through gambling drugs, going for long odds, begin too easy with short odds. I lose my money by staking unreasonable ventures, loose women, and bad ventures. Not a lot of misadventures but enough to affect 11% of my bottom line. Add that to my losing trades, my 30 dependents, and I have a big nut to make every month. Nothing like the Chair, but still significant. There should be a place in the hall of fame foe us grinders who knock it out every month for years…That's gotta count for something.

Duncan Coker writes:

On the topic of hoodoos, when I am performing a task others can either help me perform better, have no impact, or lead me to perform worse. A hoodoo would would reside in that last category. I am not so concerned about their motivation or intent, just their impact. With my favorite fishing comrade, we actual raise the level of our game so to speak, so an inverse hoodoo. We share information on the flies that are working, fish caught, good spots on the rivers, ( after a small bit of subterfuge of course for good measure). We have a good rhythm of leap frogging each other up the river, alternating the good stretches, not spoiling the water ahead for the other. Plus the general level of conversation or lack of it fits well with the day allowing us to focus on the river and landscape around us. In a pinch we can count on one another. I recall one day I slipped and snapped my fishing rod while at the same time managed to lose my fly box and all flies and watched it float away into the fast current. My friend saw it all and after a few jibes, offered to share his set up, and we took turns the rest of the day. We landed my rainbows that day.

But I have fished with hoodoos as well. One guy we nicked named Trigger. He was so nervous and jerky casting and moving around the river we thought he had an itchy trigger finger and thus the name. He could destroy a beautiful fish laden stretch of river faster than anyone I have seen, with sloppy casts, poor retrieves and a general disharmony with the environment. And he liked to talk, talked way too much. So just being around the guy brought my fishing down and took away my rhythm. Plus, he had the very real affect of spooking any fish near us. They must have known he was a hoodoo as well. One day was enough with Trigger.

Nick White comments:

Actually, I wonder if the null hypothesis is that we're all natively hoodoos…with only will, practice and a life record to help us refute it?


George Parkanyi responds:

Humanity in the aggregate, and individuals all, are - maybe flawed isn't the best term - let's say limited, at any given point, by the sum total of our experiences and our genetically born underlying capabilities and pre-dispositions. Most of us I would think have far more potential than we ever actualize. As infants and children, we start out gang-busters, absorbing everything - especially information and ability most pertinent to our survival. It is primarily a world of exploration for us at that time, underwritten by the support of those that take care of us in the early years. We're all about curiosity and imagination. As our thirst for knowledge and experience leads us to new experiences, we also begin to develop routines and habits, which enhance efficiency and conserve energy, but also help us re-experience that which we have enjoyed or that have worked in our favour before. The filtering begins, and the type and nature of recurring experiences that we seek increases. Habits take form, even at a young age. The continuously developing habits, I believe, progressively and increasingly compete with our desire and ability to pursue new experiences. At certain points in life, we even choose massively pre-packaged experiential templates (e.g. marriage, career) as well, which hugely filter and channel our future experiences. Ultimately, we (not all of us, but a large portion) reach a point where there is no further desire to seek new experiences that are outside our past experiences. Our habits completely define us. As we age, we also begin to lose the resources, particularly health and energy, with which to pursue and expand our overall life experience.

Perhaps a hoo-doo is simply a person that can or will not go to the next level, and finally settles for habit being the determinant of his/her future experiences. Perhaps they give up on the pursuit, or are ultimately distracted away from seeing or imaging that next level of experience beyond the point that they have already reached (which point would be different for each person), and never even think to look toward the horizon of their life again. All I know is that habit is a very powerful force, and ultimately I think it overwhelms us.

John Holley comments:

"Amen, JT. Sorry I made you burn a shirt that time I hugged you at the Mets game, Vic!" KD

Just to show I put my actions where my mouth is, I will share with the list that I recently have read two very important books that have shaped my life thus far. Both are shared favorites, highly insightful, and forever giving and common amongst the Spec Listers:

1) Memoires of a Superfluous Man - A.J.N. (via Vic)

2) Five Lessons: The Modern Fundamentals of Golf - Ben Hogan (via my Dad, also Kevin Depew's fav golfing book)

These books are on my top ten list. If you haven't read them then do it. In fact read them over and over again.

Other than G-man's speech in Atlas, the 1 thing I hang onto that Lack shared recently in a post regarding his Father that would get you out of being a Hoodoo is appropriately going to be number twenty six.

26) “If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down on his shoulders—what would you tell him to do?” " To Shrug." Shrug, bare more. Your mind can handle it.



goldI noticed yesterday, even with the latest sell off in equities– Euro, Aussie– most majors against the USD held firm. Was this a signal about an imminent, albeit maybe short term, momentum shift?

Secondly, what great structure the gold market has on this move. It looks interestingly poised at the moment. It failed to take out the recent swing high, resulting in a double top, and now resting on the recent higher degree trendline from its last acceleration at a new velocity. As the double top is fairly close, it's not see as a signal for a massive reversal, but no doubt needs to be respected. There will be a couple of days of tight trading no doubt.

Nick White writes:

GladiatorIs not the currency market the place of greatest despair– a sort of trader's purgatory? I can almost smell the sulfur, feel the rush of steam escaping and hear the screams of those labouring eternally under their use of 500x leverage.

In fact, FX markets and traders make me think of the film Gladiator…relegated out into the midst of some provincial nowhere (my edge is in ZAR/ESS!!!), taken as a slave, forced to fight in the most barbarous and treacherous conditions, with shoddy weapons (TA), plagued utterly and hopelessly by randomness: all for the minutest, tiniest conceivable chance that they might one day win the series of coin tosses, fight in front of the Emperor in Rome, win their freedom, and be allowed to trade something substantive less colourful language: FX seems to me to these days to be all noise, no signal– except in a very precious few situations. 



Socks on the handsI believe the absence of routine may be a critical factor in creating failure. All the distractions, including the physical and mental act of taking phone calls is enough to throw a game off. I liked to do very normal things throughout a tournament, as I reached the finals, and I would recommend that for a trader. Whatever you do, don't use the hands and mid level organs before you play.

Nick White comments:

I also hold that routines are essential to success– no doubt about that. But is there some wisdom in allowing for the fact that life throws the odd curve-ball? Are there circumstances whereby following a usual routine will get one badly hurt or killed (market or otherwise)? What ought to be done when a personal disaster strikes 2 minutes after one has placed their largest position and it then gaps half a percent against? What principles of training facilitate adaptation to the wild rather than adaptation to the expected?

One society in history seemed to grasp this - the Spartans. Their routines seemed to emphasize preparation for both the expected and predictable, as well as to develop faculties, skills and resources to deal with that which was difficult to prepare for…in other words, to build up so much personal and corporate redundancy in capabilities that there was very little (bar hubris) that could steal the victory.

Jeff Watson writes:

 Whenever I am in any kind of competition, trading, poker, surfing, whatever I try to follow the same script., In poker, for example, I pick up the cards the same way every time, look at them once and leave them face down on the table. I handle my chips the same way every time and time my reaching for the chips do it in the same manner. I keep the same vacant look on my face and time my eye blinks. I keep conversation at a polite minimum as tremors in a voice can give away tells. I wear a high collared shirt as I don't want a pulsing jugular to be seen. I have several other proprietary methods to minimize any tells and other methods to create false tells. still, according to one of the ex-world champions of poker, I have less tells than anyone he's seen, but the tell I have makes him able to read me like a book. From past results, I believe that he's telling the truth.

Nick White asks: 

Can tells in a closed-form game compare to tells in a wild environment? If one lost a comparably ruinous percentage of bankroll in the market as their poker game, would the displayed tells be the same? Or concealment easier? 



They say a picture paints a thousand words, and they don't get much clearer than this. [Warning: not for the faint of heart. Picture from a bullfight in which the bull won].

The number of market jokes/ lessons from this particular photo must surely deserve some prize, but just in case you wanted the actual story, you can read it here. I beseech the Chair to instigate a caption contest.



Reading the histrionics in the media (and seeing some comments on here of late) on HFT, I have decided to vent my frustration and throw my hat in the ring on the situation.

HFT is no more evil than any form of arbitrage. If you're fine with arbitrage (and I assume 100% of us are), it is my contention that you should, rationally, also be fine with HFT.

As far as I see it, HFT equally helps enforce the Law of One Price just as arbitrage does. What's more, both HFT *AND* vanilla arbitrage share the exact same rational premise. Both are seeking to drive prices from inefficient fragmentation to a place where no profit can be made via price discrepancy alone.

Allow me to explain: With vanilla arbitrage, profit comes from knowing two prices exist for the same thing (or cash flows) and taking advantage of that knowledge by buying the cheap price and selling it simultaneously at the expensive price before others do. With HFT it comes from knowing pretty much the exact same thing…"over on exchange x this stock is bid / offered at 23.05 / 23.07. Over on dark pool y, by virtue of my better infrastructure, I can see thousands of shares offered at 23.05…I will rip every share I can find at 23.05 on the dark pool, then turn round and offer them at 23.06 on the exchange in the assurance that lazy institutional VWAP algos will be forced to take it off me". Is this any different from being able to buy or sell the same quality and quantity of gold on two different exchanges at two different prices before anyone realises? There is no philosophical difference.

Think of trading in its ultimate philosophical and mechanical terms. Using the HFT vs arbitrage example, it doesn't require an enormous leap to see that both styles of trading rely on a qualitative difference in available information. Supernormal information is profit potential. Couple it with speed, and you shouldn't be surprised that someone consistently makes dollars….until they lose either their information or their speed advantage (or either one remains static while their advantage in the other one diminishes). This confirms *everything* we know in corporate finance: the whole notion of alpha and beta, CAPM, EMH - you name it - relies on the distinctions that information provides. Can't make supernormal profits without supernormal information…and so much the better if you can act faster on the same bit of information than anyone else. This is, after all, how information advantage works across myriad fields; Pheidippides' legacy came to be called Marathons, billions of dollars is spent each year on intelligence etc etc. Heck, even in its weakest form, those of you who pick stocks fundamentally look to do the same thing - you believe your information is better, so you buy or sell to the next mug who will take your price - who, in turn, thinks you are a mug for buying or selling at that price. How is that process philosophically different from HFT? And don't say that time is immaterial either….anyone who has ever lamented a bad fill from a broker when the market is moving away from them are guilty as charged.

I have no doubt that people railed against arbitrage in the early days. They probably railed against the firms that made money from it. There were probably enquiries and investigations and probes. The public likely lamented those who figured it out and called them cheats. Arbs doubtless caused panics and sparked runs in different instruments. And, just as with arbitrage, HFT will be shown to be benign because it is just one more method of sucking profit potential out of price inefficiencies. Markets benefit, long run, from having HFT. On that point, let us not conflate "efficient markets" with "profitable markets". It's obvious to all that traditional avenues of profitability are drying up very, very fast.Traditional sources of alpha have now very much become beta for the vast majority of players. That's not to say that alpha is dead - it's just tougher to find. One of the "easier" places to have found it is in latency technology - but this too shall pass. Arbitrage has more-or-less disappeared because people learned to spot the opportunities and cash in on them in ever decreasing time periods. So too with HFT. The first cracks are there to see. My point is that everyone screams about how unfair these programs are, but HFT and arbitrage aren't so much about investment skill as they are exercises in information theory, infrastructure design and speed; all elements of efficiency.

At this juncture, I'd like to draw a couple of quick comparisons. First up, sports have recently provided an example of increasing symmetry of information. Coaches and teams spend millions on film, statisticians, data analysis, equipment and so on. But it wasn't always this way. Did those teams garner an "unfair" advantage? Not many would say so. Was it unfair when athletes first figured out that a good pre-race meal of carbohydrates was better than steak and eggs? Not many would say so. The aftermath of stories like "Moneyball" or "Fortune's Formula" show that these little edges disappear in time as everyone else picks them up - and so it is with our arena. But there are always new edges to discover. Discovery requires creativity and persistence.

Secondly, HFT and flash trading are just another stage of evolution in the market. Biology teaches us that mutations / adaptations are not, by themselves, either good or bad. Rather it is the *environment* that determines whether or not an adaption becomes an advantage. And so it is with the market. Right now, the market environment allows for profitability in discovering sub millisecond price advantages across market venues. Those who have "mutated" to exploit this are profitable. Those who haven't will struggle to compete in that niche…unless the environment changes, or they find a different niche to compete in.

I tell you the truth, friends: the day that HFT becomes unprofitable for institutions is the day they begin offering it to retail. Everyone on this list is smart enough to recognise this phenomena. Retail will get their crack at HFT - but it will only be once all the fat has gone. Regulators: let the market do its self-correcting thing to sort out this problem. The tax system of every G20 nation should ably demonstrate that the more stupid rules abound, the more creative people get at working around them. If you want to really change things, change the environment. Hong Kong is a great example of this.

The right response for every participant (especially myself) is to get better, not to whinge about how "unfair" a system is that is patently not unfair at its most general level. Be more competitive. Take a hint if you're consistently losing and figure out why. Do better homework. Throw out the tired old "do this" books, and replace them with books on scientific method and practice. Learn new fields. Develop new specialties. Don't be satisfied with the linear, but go hard after the non-linear. Focus your energy on your own game, rather than worrying about what GS or the Sage or the Palindrome or the woman on a winning streak down the desk from you are doing.

You want to beat the machines? Do what the machines can't do - think for yourself.

Sam Humbert gives his point of view:

It's hard to know whether Mr White is limited by his knowledge of the field, or has an axe to grind. In any case, the core issue is stepping ahead via subpennying — bidding 41.0301 to step ahead of a 41.03 bid — which is permitted for some market participants, but not others.

Before writing further on the topic, Mr White would do well to read deeply on the subject, and attend one of the excellent high-frequency conferences currently on offer. The one sponsored by Wall St & Tech magazine May 11 in NYC was very good, and there are others upcoming.



 It's worth bearing in mind that unlike most of us here, sell-side bank desk traders don't really get much opportunity to pick and choose their positions as they want and when they want. If customer wants to do big size in x, they might get saddled with the other side of that trade, bad gamma and all. The trader might not even want the position, but the head of sales "authorizes" the deal because the trade is for a new, big, shiny mutual fund customer they want to facil– just before the market does something the sales dudes thought was "unthinkable"…like spiking down 8% in the space of 10 mins.

It's a bit like flight tests when releasing a new aircraft. Yes, you might be able to handle a situation that you can almost completely control…normal flight situations and some 2 sigma variations…but what happens when there's a catastrophic failure that you're not ready for? That's why airbus et al do lots of tests to see what happens when fan blades come off at maximum engine rpm; testing whether the vibrations at the edge of the flight envelope will tear the plane apart. That kind of thing. Should be the same with trading– especially given the excess-kurtosis environment we deal with as a matter of course…at least aero-physics is reasonably predictable and stable.

There's much we can learn from this. Maybe we can set up simulators to give us a random position in xyz, then run some randomly-selected real-world crazy historical scenario against us. The emotional hit wouldn't be the same, but at least it might help develop a protocoli agree that if you are the captain of your own ship, you have no-one to blame but yourself. But many participants in the market can get nailed with positions that aren't their direct choice. No one's asking you to cry for the bank traders….but, as Taleb says, it's never a good idea to ask a man if he's from Sparta.



NASDAQ TO CANCEL ALL TRADES GREATER OR greater than or less than 60% away from the last printed price prior to 2:40 pm eastern time, up to 3 p.m.

Recall my comment on snipers the other day… This seems to be a classic example of my friend's observation of the enemy sneaking behind you to put the revolver against your head while one is busy staring through the scope. 



nVidiaI'm wondering if anyone has much experience running trading apps or data crunching on Amazon EC2, etc.? Real heavy-duty analysis where you can bring 16 cores to bear on the issue. It would be helpful if anyone has tips on using Mathematica, R and Bloomberg in such an environment, especially if you've seen trading apps operating real-time.

Phil McDonnell writes:

For the princely sum of around $100 one can get something like 250 cores to do parallel processing. Software is available for R and some other packages and languages. I don't know about Bloomberg. It's all done with the nVidia graphics GPU. It is programmable from the main CPU and massively parallel. The technology allows applications that would otherwise take weeks to happen in minutes or seconds.

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



sniperWhen discussing today's market action with a friend, the following chat conversation took place:

me: Market's crazy again.

friend: Yep i noticed…herd mentality causing kids to run from one side of the playground to the other.

me: Fine by me. Opportunity to play sniper in the market again and take advantage of people being dumb.

friend: one of the hardest things about being a sniper is not neccearily the distance from which you shoot, or the accuracy required when you shoot, or finding that perfect location, it's probably being too focused through the sights of your scope to not notice the private that snuck away went arround you and is now standing behind you with a gun to your head.

Wise words indeed…

Ken Drees writes:

That's why snipers work in teams–to watch prey and to cover rear guard.

Bruno Ombreux comments:

I was told that the spotter is not technically needed. He is only there to share the psychological burden arising from killing too many people.

For the same reason, some Investment Banks praise teamwork, notably in their structured finance department.

Peter Grieve writes:

Not sure this is relevant, but I heard that snipers never ever make it to prisoner of war camps. When an identifiable someone has been deliberately targeting your friends as individuals, accidents always seem to happen in the prisoner-taking process.




 The confirmation bias is the tendency to search for or accept as valid information that is consistent with a prior belief and to exclude or reject information that challenges the prior belief.

As powerful a resource as the world wide web/ net is for doing research it seems that unless one is very careful this bias can impact the search words one uses thus strongly promoting the confirmation bias. Since the net has articles and posts that support virtually every point of view it is inevitable that point of view will strengthen over time as more and more articles are found that confirm the belief that biased the search.


Nick White responds:

I think your query is an excellent one. There will be other readers of the site of vastly greater eminence and skill than me in the field you have brought to our attention. However, I'll take a dilettante stab at responding by highlighting a coupe of good pieces of literature on the topics of biases / scientific method… and look forward to the honor of being corrected and informed by my betters. I'll also note that I'm not a professional scientist– merely of the armchair type, and a bad one at that. Secondly, I will cite quite a few names and sources in my response; these readings have been for personal pleasure rather than as part of a course where I've been goaded into critiquing them. In other words, my interpretations of their work might be a load of old tosh. That said….let's get on with it!

To me, your query goes to the heart of the philosophical foundations of the scientific method– and therefore difficult to answer either succinctly or with conviction. Happily, greater minds than our own have wrestled extensively with your topic and, I believe, have some useful answers for you. My aim is to present a thumbnail sketch of the thumbnail sketch of their work. I recognize that boring one's audience is the worst of solecisms so, at the risk of vast oversimplification, I will state my conclusion up front, lest anyone wish to proceed no further (likely a good idea): I believe it is fairly safe to say your answer lies with the tenets of "skeptical" empiricism. That is, one applies as best as possible the criterion of "falsifiability" in their work and research. The trick, as ever, is actual application.

Before we go on, though, I should like to define terms. You say that confirmation bias "is the tendency to search for or accept as valid information that is consistent with a prior belief and to exclude or reject information that challenges the prior belief". I'd like to demarcate that a little bit for our discussion. Richard Thaler summaries much when he writes that, "[belief perseverance means] people are reluctant to search for evidence that contradicts their beliefs. Second, even if they find such evidence they treat it with excessive skepticism. Some studies have found an even stronger effect, known as confirmation bias, whereby people misinterpret evidence that goes against their evidence as actually being in favor." In contradistinction, the behavioral literature seems to distinguish your definition as motivated reasoning, that is, "thinking biased to produce preferred conclusions and support strongly held opinions". Yet these biases themselves may simply be symptomatic of more problematic and pernicious dysfunction in our mental machinery. What could these biases be that "sum to" motivated reasoning?

A non-exhaustive inventory might contain at least five other biases in particular. First up is survivorship bias - that only the winners and survivors get to tell their story and present their data (irrespective of how one frames the enquiry to them). Next, we must account for Kahnemann / Tversky / Slovic's availability and anchoring biases. Availability is "the ease with which relevant instances come to mind". Anchoring is our propensity to estimate solutions with disproportionate reliance on– and influence from - the initial conditions. Fourth, we have the work pioneered by Kelley in the area of attribution, "man …infers causes for the effects he observes. The causes he attributes determine his view of his social world, and this view may determine his behaviour". Fifth, we have K/T's "errors of prediction" which, inter alia, states three principles. First, people rely too much on their "prior" intuitions when making assessments -even in the face of new, objective information. Second, people do not vary their predictions in line with the validity of the information on which their predictions are based and, fInally, people place more confidence in predictions based on highly correlated predictor variables than rational analysis affords them. The preceding doesn't even begin to touch on the personality dimensions of bias - that is, why our egos are constantly on the hunt to be "proved right", or the evolutionary ones - that biases are survival mechanisms!

So, given this diagnostic, what conclusions can we draw so far? It seems we can say that we're wired to confirm our hypotheses because it's convenient, it's fast and it's pleasant. As a result, we make judgment and inference errors that could be avoided if we had more robust methods to compensate for them. But why is confirmation "bad"? What's wrong with the proposition of reinforcing your beliefs and proving your hypotheses with more evidence of the same?This dilemma is not a new one. English polymath Francis Bacon highlighted the problem in the 17th century– and it has been a source of debate for much of the period since (incidentally, he was all for confirmation; though I put this down to his being a lawyer and the legal climate of his times). Today, the problem lies within the domains of philosophy; principally epistemology (what do we know, and how do we know that we know that we know it?) and the problem of induction; in other words, the realm of * falsifiability*. Sir Karl Popper (your principal, go-to guy on philosophical questions of method) argued forcefully that a hypothesis is not empirical -let alone scientific - unless it is falsifiable. What does this mean? For example, an unbroken string of sightings of white swans does not confirm the hypothesis that "all swans are white". But a single sighting of a black swan shows the hypothesis to be false. Conversely, claiming "there may be aliens in space" is not falsifiable. This is important because of the elusive nature of truth and certainty (at least this side of Heaven). One can never prove anything in this life with absolute certainty. All we have are probabilities. Once that notion is at the heart of one's scientific investigations, the door to statistical introspection swings wide open.From that point, at best, we can say with certain degrees of confidence that something "isn't" something else.

Ultimately, I can do no better than quote Sir Karl:

*Science is not a system of certain, or well-established, statements; nor is it a system which steadily advances towards a state of finality. Our science is not knowledge (epsiteme): it can never claim to have attained truth, or even a substitute for it, such as probability…

*We do not know: we can only guess. And our guesses are guided by theunscientific, the metaphysical faith in laws, in regularities which we can uncover - discover.

*But these marvelously imaginative and bold conjectures of ours arecarefully and soberly controlled by systematic tests. Once put forward, none of our anticipations are dogmatically upheld. Our method of research is not to defend them, in order to prove how right we were. On the contrary, we try to overthrow them. Using all the weapons of our logical, mathematical and technical armory, we try to prove that our anticipations were false– in order to put forward in their stead, new unjustified and unjustifiable anticipations, new ' rash and premature prejudices' as Bacon derisively called them.

*The advance of science is not due to the fact that more and more perceptual experiences accumulate in the course of time. Nor is it due to the fact that we are making better use of our senses….bold ideas, unjustified anticipations and speculative thought are our only means for interpreting nature…and we must hazard them to win our prize. Those among us who are unwilling to expose their ideas to the hazards of refutation do not take part in the scientific game.

Thus, I would contend alongside Popper (oh, how I deign!) that empiricism untempered by proper falsification might be many orders of magnitude worse than no empiricism at all. The safeguard you seek in your query is to, as widely as possible, practice rigour in all your habits and research - most importantly, the principle of falsification. Around these parts, the Chair et al have been known to throw out more than the occasional, "um, have you tested that?" to those making a particular claim of one sort or another. It's not for show.So, that's my thoughts on your query. We may avoid confirmation bias and the multiplication of its effects in the following (non-exhaustive) ways: Know which biases may impact your research. Run Popper's Logic of Scientific Discovery over your processes; especially the criterion of falsifiability. Will bad research persist? Sure. It has for centuries. Will it become ubiquitous? Not if science and scientists are doing their jobs properly.What practical steps can we take to effect these principles in our daily work and lives? Bischoff has provided some helpful guidelines: Know your cognitive frailties. Actively seek contrary evidence…force yourself to do it, or have a mentor well versed in creative destruction of your bad hypotheses. Put confidence estimates around the quality of information / data you have obtained. Educate yourself constantly (but don't rely on it too much - heavily discount your own smarts).

From Taleb: know in which domains you can safely apply induction (largely stable, natural phenomena) and which ones may get you into hot water (complex / contingent outcomes relying on inferences drawn from limited observations…because of the massive distortion and impact of rare events in the distribution of outcomes). Relentlessly build in redundancy to all you do and hypothesise. Be humble, and know that you know nothing– even on your best day. Visit graveyards and consider the untold stories of those who "didn't" make it -only survivors get to tell their stories with conviction and credibility. Consider alternative histories, and adopt the probabilistic mind-set. Apply the lessons you have learned from your textbooks to your whole life, not just the narrow, specialized context in which you learned them.I hope this sparks some good discussion! I'd be very interested to hear critiques, comments, additions etc. I'm attempting to stand on the shoulders of giants, so any misinterpretations, misquotes, misattributions or any other mis's are entirely my own.

Source / reference list:

- Kahnemann, Slovic, Tversky (eds): Judgment under Uncertainty: Heuristics and Biases, Cambridge

- Kahnemann, Tversky (eds): Choices, Values and Frames, Cambridge- Slovic et al: The Perception of Risk, Earthscan

- Taleb: The Black Swan, Penguin- Popper: The Logic of Scientific Discovery, Routledge

- Thaler: Advances in Behavioral Finance (Vol II), Princeton Publishing

- Peterson: Inside the Investor's Brain, Wiley- Forbes: Behavioural Finance

- Gauch: Scientific Method in Practice, Cambridge.

- Chamley: Rational Herds: Economic Models of Social Learning, Cambridge 

Pitt T. Maner III writes:

A quick overview of a few of the issues you have discussed is presented by James Montier in his latest book, The Little Book of Behavioral Investing– How Not to Be Your Own Worst Enemy. Problem examples in the book illustrate many behavioral traits that one can become susceptible to. Montier shows that one must be ever vigilant and self-aware of narrow-thinking, over-optimism, faulty statistical reasoning, over-conservatism, majority group thinking and assorted biases. One quote from the book reads, "Question authority, but don't accept the answer".

Montier's own soft spots, however, may be an over attachment to value investing and Graham techniques. More knowledgeable critics can decide.

Here is a two part interview with Montier related to the book.

Part 1
Part 2

A snippet from the 2nd part of the interview:

Miguel: Give us some insights – how can we become critical thinkers.

James Montier: Critical thinking is really all about being a contrarian in thought. Learning to be skeptical, to question what you hear, and evaluate it based on merit, rather than emotional appeal. In essence taking a contrarian view point requires us to learn three skills.

The first is highlighted by the legendary hedge fund manager Michael Steinhardt, who urged investors to have the courage to be different. He said, “The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.”

The second element is to be a critical thinker. As Joel Greenblatt has opined, “You can’t be a good value investor without being an independent thinker—you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value.”

Finally, you must have the perseverance and grit to stick to your principles. As Ben Graham noted, “If you believe that the value approach is inherently sound then devote yourself to that principle. Stick to it, and don’t be led astray by Wall Street’s fashions, illusions and its constant chase after the fast dollar. Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character.”

Chris Cooper writes:

I recommend the blog called Overcoming Bias for discussion of many other biases and their application to real-world problems. You may also like Less Wrong.



Lea Michele from GleeA bit like eyeing up a Snickers bar after a tough day in the trenches, the TV comedy/musical Glee seemed to me to be the TV analog of said sweet treat– tempting, but ultimately unfulfilling and potentially leaving you with the regret of having consumed it. I couldn't have been more wrong.

Yes, the premise is sugar coated; cast of Ohio high-school teachers, quirks, odd-balls, princesses, jocks and cheerleaders all get thrown together in various ways to form a glee club. Must overcome various challenges– personal, social and ecological– to achieve their goals. But the execution of this premise is anything but sugar coated; the show plays off its own stereotype and doubles back on itself with plenty of dark, biting humour and enough interesting plot turns to keep the greatest skeptic entertained.

I found the show to have a very positive effect. It's unrelentingly optimistic without being cheesy; the songs are a great mix of old and new, the costuming and direction are bright, dynamic and vibrant, the cast are all very believable and have nailed their role stereotypes perfectly. All this combines to really rub off and put one in a happy, goal-achieving frame of mind.

This is all quite intentional…from the wiki entry:

[Creator, Ryan] Murphy intended the show to be a form of escapism, explaining: "There's so much on the air right now about people with guns, or sci-fi, or lawyers running around. This is a different genre, there's nothing like it on the air at the networks and cable. Everything's so dark in the world right now, that's why Idol worked. It's pure escapism."

The highlight for me is the alluring Lea Michele, cast as lead female Rachel Berry. Michele has been on Broadway (Les Mis) since age 8. Her voice is so strong and so bright you can't help but smile when she sings. Her character is so naively earnest, ambitious and bright (on the treadmill at 6am every day  listening to "break my stride" while visualising her goal of winning a Tony; signing her name and placing a gold star next to it, etc, etc) you can't help but love her despite her occasional lapses into deep conceitedness. She plays a great foil and anti-hero to the pretentious slickness of the princess chearleader types.

Also worth mentioning is the unique Jane Lynch. She, as coach of the school's rival cheer team, sends up with great aplomb the model of the uber-driven, take-themselves-way-too-seriously, high school coach (and their charges). Very enjoyable. Never fails to put a smile on the dial, despite the occasional lapse in plot. Plenty of fun for kids and adults alike. Optimism reigns in Glee and thus makes a great ancillary recommendation to specs of all stripes. The cast albums and tracks from the show are available on iTunes.



The fool tarot cardWhat are the many types of people who disseminate their views about the market?

There's the tout, the man who has a position and wants you to get into it so that it will move in his favor. There's the sponsor, the man who advertises or sponsors a program who is always treated well by that program. There's the would be manager, the personage without funds who wishes to impress you with his knowledge and ideas so that you will put money up with him. There's the old lion, the man who no longer is virile and is fighting back any young men who might take his place in the world of power or romance. There's the curmudgeon, the old man who hates everything modern, doesn't own a CD or computer and sees no reason for it, and wants to bring everyone back to the old days without technology. There's the spankist, the woman who's beautiful and always looks like she is so aggrieved with the pubic or her guest that she would have to give him a good spanking unless he puts his things in order. There's the iconoclast, the person who's always contrary and never reads the papers or travels to New York, and always feels the market is wrong.

There's the man with a hole in his shoes who's so down home that he only drinks coke and eats hamburgers and never pays a fee more than 10% of the going rate to the brokers. There's the sanctimonious, the one who pretends to be the most honest person in the world– who won't under any conditions tolerate a blemish in the reputation of his firm even if it costs him a good stake. He's the one who never hears or is briefed about the dishonesty in his troops and finds that any allegations of misdoing in his firm that are brought to his attention never pointed directly in writing to the crime. There's the academic, the man looking for a consultancy who can manipulate numbers especially retrospective files that are very suggestive of alluring profits that a wealthy investor might wish to participate in with him. There's the mystic, the person who looks at the stars and the bent keys. There's the old timer, the person that looks at the iron castings reports and freight car loadings and newsprint figures for guidance as to where the economy is going. There is the fund manager, the man who will always be quoted on a given stock that he owns which he feels is a good buy still but which he sold the bulk of his holdings of in the quarter before the recall.

There's the jack of all trades, the personage who will explain the market going up as due to a good economic report or falling interest rates or who will explain the decline as due to uncertainty about earnings or fears of interest rate rises. There's the chronic bear, the person who never since 1966 has written a column that did not find the weight of evidence highly bearish with signs of excess in many quarters and regrettably some signs of optimism still persisting. There's the humanitarian, the person who believes that the world is very selfish and that the solution is to force everyone into doing good by redistribution or service. This personage also believes that the only good people are the poor and that the purpose of life is to make sure that any pockets of poor are stamped out regardless of how it's taken or from whom. Of course, many of these personages fall into more than one of these categories and they are mobile as their age and wealth changes. What are the major categories that I am missing or what is a better way to classify and make this useful?

John Lamberg comments:

And the mark, who in a hushed tone, glazed eyes, and a glance around the room as if someone was eavesdropping, reveals the privileged information that will make him a rich man. And the friend who, seeing the tells, suggests to deaf ears to exit before his pocket book is emptied… 

Ken Drees writes:

Permabull type–always likes the market anywhere, anytime. Wears high fashion suits, well coiffed–male or female. Strong BUY! spouse/lover/significant other–why didn't you buy that, hun? Why won't you get back into this one, dear. I read about that in the paper–are we in that? Foreign fund guy–always likes an exotic market somewhere over there in that far off place. Always a better value there. Always more room for catch-up to other valuations. 

Nick White writes:

With precious few exceptions, doubtless one can point to many of the most eminent bank of Sweden prize laureates…they most often get trotted out as permission to allow others to do the thinking. 

Kim Zussman adds:

Don't forget the Walter Mittyist.

Market hobbyist with secret hopes to surprise to the upside. Knows a little about a lot, but nothing in depth. He dangerously equipped with the same software and data filtered hourly by everyone in the 100 million Mitty-march.

Known to recognize causal patterns everywhere, convinced they are invisible to others. A market philanderer, he migrates wounded from one instrument to the next, and from one seductive strategy to another. Momentum - reversion - correlation - divergence.

Mitty envies his brother, Admitty, who worked for the city and retired at 50 with 90% pay.



DJIA1. One notes a too smart by half breach of the round today in the DJIA. What fools the g_ds must think the mortals must be.

2. For yet another time, the bonds have suffered a grievous decline before 10 and 30 year auctions, threatened breaching the 4% and 5% levels, and bounced back with alacrity to levels that do not threaten the economy. How many times can history repeat? One is reminded of Crocodile Steve who always said that when he ran the show, the crocs were particularly vicious because they all remembered it was he who caught them. Thus, he never entered the arena at the same spot twice as they waited in ambush for him at the last place.

3. We frequently talk about what fields as disparate as rodeo and radio can teach us about markets, but not as often do we consider what we can learn about life from markets. One has been considering the general question of happiness. What can we learn about it from markets?

Here's a interesting gambit. It is well known that after monthly maximums the variance of the move in the S&P the following day is considerably less, indeed 1/5 as great as the variance after monthly minima, and a mere 40% as great as after normal days. The standard F tests for comparing equality of variances by looking at their ratios, which has a critical value of 1 at the 1% level of significance show that these divergences are quite impossible under randonmess. What does this tell us about human happiness, and yes, what does it tell us about markets, also taking into consideration that the maxes occur twice as frequently as the mins over the past 15 years. 

4. "The Knicks never lead, falling behind 4-0 in a sign of things to come" in losing 118-90 to Portland on March 31. What can we learn from that?

Jeff Watson writes:

Steve IrwinA corollary to point number 4. In 1969, the Chicago Cubs were in first place all season long. At the beginning of September, they had a 84-52 record and were a solid 5 games ahead of the NY Mets. By mid-season, the Cubs were already getting ready for the series, and they even wrote many songs about them.The Cubs choked and lost 17 of their final 23 games while the Mets went on a tear with a 23-7 record, overtaking the Cubs and ultimately finishing 8 games ahead. The Mets ultimately went on to win the World Series, while the Cubs quickly regained their status in the cellar. Still, Chicagoans love the Cubs, win or lose, as there's nothing like a good day at Wrigley eating hot dogs, peanuts, cracker jack, and plenty of beer to wash it down.

Nick White responds:

I immediately think of case studies of Olympians– especially Olympic Champions– as they try to adjust back to normal life, post-Games. It's not an easy transition. Post-competition depression is a real thing and the market being what it is, probably can teach us much about how to handle ourselves after a major peak or trough.

Livestrong gives a good summary of the problem:

Many athletes spend years preparing for a narrow window of opportunity–a college career, the Olympics or professional sports limited to certain ages. Intense preparation, daily practice and adjusting life to meet the sport's needs may dominate an athlete's life. After the particular event, an athlete may lose his sense of purpose and have a hard time reintegrating into a routine that does not focus solely on the sport. An athlete may experience depression if he is unprepared for the transition.

To follow the example you provided, on the day (or weeks) following their victory, Olympic champions are unlikely to go 'round the village, find their competitors from the event they just won, and then challenge them to repeat their world-best performance again…there's consolidation, reflection, relaxation. An entirely appropriate response. Without further stimulus there is rapid atrophy and de-training. There are dozens of studies of the de-training effect. With well-timed, appropriate breaks there will almost certainly be the possibility of greater physiological improvements (see any of the literature following Bompa et al on training macro, meso and micro - cycles).

This sounds remarkably like the behaviour of the market. The sports physiology literature probably has much to teach us about the extrema of markets and the conditions of extension in such situations.

Furthermore, not everyone puts themselves into an intense period of stress and competition that they have been preparing for for a prolonged period of time, yet the market does this reasonably frequently. So, being a collective representation of human emotions and biases, it's probably fair to hypothesize that the manner in which the market responds after minima or maxima is probably a fair aggregate of how we can expect humans to behave on aggregate when experiencing highs or lows in their personal lives. Hence the market can perhaps teach us something and, from that base, we can then perhaps devise strategies to more efficiently handle such periods in our personal lives.

What also of the incidence of disorder when a highly focussed instrument loses its purpose–temporarily or permanently? But, your proposed study begs a question of logic– is it possible for the market to teach its creator something directly? The market doesn't have independent existence from its participants or a character of its own any more than a violin is capable of playing music lest someone pick it up and play it. So is it better to just to review the behavioral literature directly?

Rocky Humbert writes:

The question posed is a variation on the much debated question as to whether stock markets decline faster than they rise. The past 19 months are additional fodder for those (including myself) who believe that they do.

Because the phenomenon of lower volatility at monthly maximums is much less prevalent in commodity futures markets, I posit that the phenomenon is related to the three facts: (1) that the S&P is a "net long" market; (2)fear is a stronger motivator than greed; (3)stop/loss sell stops are more prevalent than take/profit limit orders.

I'm not being facile when I observe that the reason most people own stocks is to make money. Hence after markets are rising for a time, most people sit back, relax, and enjoy the ride. However, when markets are declining, the fear instinct kicks in– and people feel the need to "protect their gains," "stop the bleeding," or the all-too-familiar, "I can't afford to lose any more money."I would additionally observe that markets which go a long time without a correction have more violent corrections. This can be quantified and is consistent with all of the observations above.

I have been an unabashed bull on these pages for the past two years, largely because I believe that the valuation and sentiment at one's entry point are the best determinant of one's long-term return. I am now growing more cautious– and just as I was buying stocks on a scale-to-oblivion in February, 2009, I am starting to sell-long on a scale-to-oblivion now. I am not shorting. Rather I simply observe that the same simple and timeless logic that predicted a 5 year double-digit return during the dark hours, now predicts a low single-digit return over a 5 year time horizon. I wish I knew where the S&P will be in a week, a month, or a year — but any claim of that ability would be pretense.

Ultimately, the markets' lesson of the past 24 months has once again been, "Be greedy when others are fearful, and be fearful when others are greedy."

Sam Marx writes:

I believe one more stock market action occurs that was omitted in paragraph four. That is in a rising market when there is pullback or slight sell off, buyers come in to buy the dips and the market starts its upward climb again.

Fear kicks in when the market continues to dip, maybe around 10% down, and then selling picks up.

Steve Ellison writes:

Many athletes go into sales after their playing days are over. In sales, like athletics, all that matters is performance, and the top salesman makes far more money than the VP of sales. Some sales managers go out of their way to hire athletes because athletes are competitive, disciplined, and focused. 

Jeff Watson adds:

There were a lot of athletically inclined people on the trading floors back in the day. It took an athletic person to handle the rough and tumble of the pits, even the smaller pits. A four hour trading session in the pit would be like a 15 hour shift in any other job. It was absolutely physically and mentally exhausting. 

Rocky Humbert writes:

 One answer might be that miners are lured into a false sense of security when their canaries are singing a cheerful melody– comfortable in the knowledge that the levels of methane, hydrogen sulphide, and carbon dioxide are within acceptable bonds — but over time, becoming increasingly oblivious to the growing risks of mining-induced seismicity and unstable mine stopes– until there is a violent catastrophe.

Likewise, the increasing happiness of market participants in a low-volatility, monotonically rising market are like the miners with their singing canaries– the violence and magnitude of the potential, but unpredictable and unknowable and unnecessary tragedy is directly related to the length of time between tragedies as the institutional memory of previous tragedies fade. The miners are alert after a recent tragedy, but after months/years of traquility, the happiness may mask carelessness.

The recent tragedy is probably still too fresh in the institutional memory to be immediately repeated — but those with excess liquidity were able to profit from the most recent tragedy, and those with excess liquidity will be able to profit from the next tragedy. These men are like spiders — patiently waiting for opportunity that only occurs once every several years.

The wisest man can see the future, he is indeed a happy man.

Victor Niederhoffer comments:

One would adduce inspired by the token liberal rocket scientist that the ratio of variances during the past 3 years has been 9 as opposed to the paltry 5 previously addresses. And his very interesting post brings back many pleasant memories of the meetings of the Royal Society adduced by O'Brian. A certain member when talking about nondescript features of this or that mollusk on the Mauritius was well known to steer the transactions and his talk into a discussion of the nesting y practices of a certain species of bird that I believe liked to test in coal declivities. What does the reduced variance following the bigs have to do with the tendency for declines to be more violent? A talk at the Society might be apt.

Stefan Jovanovich writes:

What miners have been saying is that "yes, setting off explosives will shake the ground" but it does not "cause earthquakes or increase their frequency". The miners - poor fools - have some direct experience with the amount of force it takes to move rock so they find the direct causal association between their cat-scratchings in a litter box and an earthquake a bit laughable. What defeats their sense of humor is the realization that "mining-induced seismicity" is yet another scientific theory whose postulate is close the mine. "Mining induced seismicity" in the sense that blasting = greater probability of earthquakes has not been proven; on the contrary, most of the statistical evidence suggests that this is an affinity fallacy: man-made explosions shake the earth, therefore naturally-occurring earth-shaking is caused by man-made explosions. The quality of science that accepts this fallacy seems to be on a par with the fans of CO2-induced global warming. (What a surprise!)

What has been helpful is to measure earth-movement activity as a predictor of roof-falls using fuzzy logic.

Of course, CO2 is a problem in mines, but it is not a "worry" compared to methane. If the ventilation fails, then people die from the same cause that occurs when they fall into a brewing vat or get stuck, without an oxygen supply, when cleaning out a grain storage bin or cargo hold. It the lack of oxygen kills them, not the CO2. Acidosis is unpleasant but it is not often fatal. The reason they put CO2 in fire extinguishers is that it is the one safest, most non-toxic gas that can be stored and then used under pressure to displace the oxygen supply.



I am wondering if anyone out there is familiar with a trading opportunity called by some, the Goldman Roll. As it has been explained to me, there is a large numbers of long-only commodity funds. As a given contract that they hold long, say oil is coming due to expire they need to sell that one and then roll into a long position in a further out contract. This creates a very definite trend in the spread that can be exploited. Sell the near one short and buy the next one out. As the roll transactions are executed the Far minus the Near spread has a very predictable and smooth rise. It is claimed that this phenomenon has not be widely recognized and thus remains in existence thus far. Any comments out there on this claim would be appreciated.

Dr. Aronson is author of Evidence-Based Technical Analysis, Wiley, 2006

Nick White comments:

Goldman Roll? More like market roll!

This has been around as long as futures have existed and is nothing sinister. However, as some here were actually around when modern exch. traded futures began, I shall defer to them.

You can maybe get some clue as to roll direction by looking at open interest depending on the contract, but it's not always a good guide. Worth bearing in mind that people hold offsetting positions and much also depends on commercials vs specs etc.Also, if it were that easy to make money, it wouldn't exist…

Michael Cohn writes:

There is index money invested in commodity Indices and a plethora of ETFs. For example, USO or UNG. These commodity ETFs hold futures and there is a need to roll the contracts in a somewhat predictable way although there is now more flexibility as to day. This long exposure always has to sell the near and buy the far contracts. It is fairly easy to see the amounts involved…

David Aronson replies:

Goldman Sachs

Yes, I am on the lookout for all of these creatures. But kidding aside for the moment, are you saying that the claim that such an opportunity exists is on par with sightings of Big Foot? i.e., it's nonsense?

Russ Herrold writes:

It is a safe statement that there are and will always be 'unknowable unknowns' out there in the woods, and that the 'Absence of evidence is not evidence of absence' (but rather sometimes, just a statement that we cannot prove a hypothesis with our current tests and tools)

If I had a Bigfoot in my basement that laid gold bars, I would never reveal that secret, and take great pains to keep that 'trade secret'.

If I had engineered a winning strategy, I would certainly consider sowing disinformation and negative results and disinformation, to lead people seeking to reverse engineer my results, down into blind allies.

I think as a careful investigator, all we can say is: We do not know of a public proof that such exist.

By co-incidence, I am wearing a tee shirt today of a Unicorn, feasting on roast leprechaun, and as she takes knife and fork to her meal, the magic rainbows are let out.

Ken Drees adds:

The idea of taking advantage of a robotic function (mindless ETF doing its monthly maintenance) makes sense; once you notice the ripoff, wouldn't a hunter now wait for the fox?

Tom Printon writes:

I used to fill the GS roll in the coffee pit. Locals typically positioned themselves one to two days ahead of GS. When and if profitable was usually good for few tics, but one had to have size on to be worth while. Off the floor trader's vig would be difficult to overcome.

Paolo Pezzutti adds:

This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.



 I believe that many (if not most) of life's lessons can only be learned through experience. Yes, one can learn about the dangers of using a chainsaw by observation and some instruction and manage to not hurt oneself, but one doesn't truly understand or know a chainsaw until one has one in ones own hands and feels the wrath of which it is capable up close and personal. There are so many trials that await us for which we come sorely prepared. Lessons about integrity, character, discipline, trust and courage (especially courage, I think) only truly sink in when they have been put to the test. Don't get me wrong, I read constantly about people I would like to emulate, whose lessons I would like to have handed to me more or less gratis. Would that it were so easy. But I have never learned anything truly worth knowing about trading (or being a man, or friend, or lover, or father) that I didn't learn thoroughly until I had a position on and, win or lose, gotten myself into the thick of things.

That is not to say that I haven't learned things from reading. On the contrary, if I thought that were the case I wouldn't be here with you now. I think one of the problems that holds us back as a species is that not only are we constantly learning, but also constantly forgetting important lessons. And the critical ones need to be chiseled away at constantly throughout one's lifetime. With a little help, sometimes you can learn a few of them early, set them deeply in your psyche and keep them with you.

Nick White writes:

Excellent points. I wholeheartedly agree that actual involvement in life is a must, and that theorising about problems is of limited value until you've actually faced them. I would argue that a healthy dose of erudition encourages wide participation in the "right" activities, while (hopefully and presumably) minimising involvement in the "wrong"ones. You're more willing to put yourself in real-world activities because you have some preparation for them and want to test your assumptions. But, then, I'm assuming rationality on our part; my apologies.

This neatly leads us into the realm of probability and expectation: perhaps we can generalise that the more personally harmful an effect might be, the more one should be taught/ learn about the activity through vicarious means (advice, books, etc etc) rather than direct experimentation? I don't think this necessarily involves attempts to understand "tail risk" (which we can't really know anyway); it's a question of expected return (admittedly, we then get down to how each person "values" an outcome, once they've assigned a probability to it). This comes back to my point about the necessity of being a good empiricist / skeptic in order to squeeze the juice out of life. Sum of probability of outcomes * expectation from identified outcomes. Hedge according to the variance. Build in plenty of redundancy for the possibility of unimaginable, outsize risks. It's not perfect, and fraught with difficulties, but it might at least provide a sign post to better results than not doing it.

The other excellent point you raise is how we might better transition and generalise book-smarts / domain-dependent expertise into life as a whole? There have been hundreds of papers on this point (eg, one might be a widely published expert in academic statistics, but fails to apply those skills in the "real world" when given a real-life problem– the expertise doesn't translate, or is non-functional). I think that is where your first point on putting one's learned skills to the test is essential. It helps to consciously apply what's been learned.

In sum: learn about a field or proposed activity as much as possible with your hypothesised utility. If you have even a small chance of doing non-trivial damage vs the expected payoff, then– should you still wish to proceed– learn from a source how you can minimise or avoid the negative payoff to maximise your positive expected return. Perform or non-perform. Report the results. Then try and apply the lessons learned to other fields…I think we have to consciously work harder on this "translation" effort. 



Please correct me if I'm wrong, but am I right in thinking that the particular suitability of Markov models to interest rate derivs derives from the term structure of interest rates vis a vis the section of the wiki entry that states:

"Since the system changes randomly, it is generally impossible to predict the exact state of the system in the future. However, the statistical properties of the system at a great many steps in the future can often be described"

Here is an abstract of a paper that might be of interest.

We introduce a general class of interest rate models in which the value of pure discount bonds can be expressed as a functional of some (low-dimensional) Markov process. At the abstract level this class includes all current models of practical importance. By specifying these models in Markov-functional form, we obtain a specification which is efficient to implement. An additional advantage of Markov-functional models is the fact that the specification of the model can be such that the forward rate distribution implied by market option prices can be fitted exactly, which makes these models particularly suited for derivatives pricing. We give examples of Markov-functional models that are fitted to market prices of caps/floors and swaptions.

Bruno Ombreux writes:

I just checked "Analysis of Financial Times Series", by Tsay. It is a relatively recent book so should be almost state of the art. It looks like Markov chains are used in two areas:

- better time series modeling, with regime switching.

- MCMC as a tool for Bayesian inference, whose main financialapplication at this point seems to be stochastic volatility models.

Practically, that would mean applications in "ever changing cycle" detection and option pricing/hedging.

On the first point, I personally toyed with Hidden Markov models. They work well in hindsight and are able to detect transitions between (high volatily / bear) and (low volatility / bull). But:

- this is all in hindsight. "Past performance is no guarantee…"
- this is low frequency data and I am not sure that the fact they could
detect the handful of past secular changes is that much useful. - a simple volatility threshold might do the job just as well without complication. - what you end up with is a probability transition matrix, which is not very helpful given that you are looking at only a few cycles.

… Maybe they could be more interesting in high frequency. I don't know.

On the second point, my opinion about option pricing is that the price of an OTC option is "as high as the buyer is prepared to pay". Models are an excuse. So I am not sure bayesian stochastic volatility models beat "seat of the pants" marketing.

Phil McDonnell adds:

If we look at the Niederhoffer-Osborne data on p. 899 we can see the number of times the market went from a don tick of various sizes to an uptick state. The reverse is also enumerated. I will take just the -1/8 state and +1/8 to illustrate the following. This matrix is the transition matrix by number of times each prior state led to the subsequent state.

            -1/8       +1/8     total
-1/8      231        777      1008
+1/8      709        236       945

From this we can compute the probabilities of being in each state given the prior state in the previous time period (trade).


           -1/8       +1/8      total
-1/8      .23        .77       1.00
+1/8      .75        .25       1.00

For Markov analysis we can make a prediction by multiplying the probability matrix by the vector which describes the current state. The result is a new vector of probabilities of being in the two states given the initial state. To predict two states ahead we multiply that by the probability matrix yet again. Let us take S as our starting state and P as our probability matrix. Then a prediction k steps ahead is given by:

S(k) = S(0) * P ^ k

Note that * is the matrix multiplication operator and ^k means to multiply P by itself k times.

What often happens is these matrices arrive at some steady state equilibrium after k iterations and we get the happy result that the probabilities are unchanged from iteration to iteration.

Russ Sears writes:

the Society of Actuaries has many research articles using the Markov Chain process. To see them all type in "Markov chain" into their home web search. I believe one of the best papers to give and intuitive understanding of its use and power and limits, is Ms. Christiansen's paper in which she gives a brief intro to many different interest rate generators.



Steven Strogatz has a great column in today's NYT (looks like the first in a series) about the foundations and intuition of calculus.

Bruno Ombreux writes:

In the same vein, I read a nice book about the history of mathematics: Taming the Infinite. The link is to the hardcover edition, because it is such a beautiful book that it is better to buy it in hardcover.

I think it would be great if mathematics were taught together with their history. Before introducing a subject, the teacher would first explain the real world questions that led to its discovery, and talk about the people behind it. Some mathematicians led very interesting lives! This way, some maths would stop looking like they were pulled out of a hat and the kids would get interested.

Pitt T. Maner III notes:

Note that Strogatz has received good reviews for his book The Calculus of Friendship. Interview with Alan Alda may be of interest too (aside–Alda should play Dr. Feynman in a movie before he gets too old, he has done it on stage in QED, it's an amazing resemblance especially his voice pattern).Dr. Strogatz discusses how his wonderful high school teacher reversed the roles and inspired him to "teach the teacher". The reverance and sincere praise for higher learning was an inspiration. Interesting overlap of life, emotions, and cold, hard math.

Strogatz discusses "balance theory" in a recent paper and wondered if it might have market implications? The plus and minus sign usage somewhat like Chair's. It also mentions Markov processes and different states:

The shifting of alliances and rivalries in a social group can be viewed as arising from an energy minimization process. For example, suppose you have two friends who happen to detest each other. The resulting awkwardness often resolves itself in one of two ways: either you drop one of your friends, or they find a way to reconcile. In such scenarios, the overall social stress corresponds to a kind of energy that relaxes over time as relationships switch from hostility to friendship or vice versa. This view, now known as balance theory, was first articulated by Heider [ fields ranging from anthropology to political science [1,2] and has since been applied in3,4].



 Just a broken-down speculator, all down on his luck
He's been through the best of his P&L

On a long lonesome credit line and an old win x86
Crossed the market-makers before throwing his towel in the ring

He was all around speculator back in '99…from the top it's been a long way
Since the whiskey and women started winning his time
They rode him high and hard to the ground

But he remembers the thrill of being a winner in the days of his first Mad
Money shows
But there was something about winning that didn't last forever

Maybe tomorrow things will get better
if the margin clerk lets loose of his soul
he'll be the all around speculator again

So he rolls up a smoke and he sips his Old Crow
Wipes the whiskers that cover his chin
And he grins as he dreams of the old markets
Now he's the all around speculator again

And the original
Just a broken down cowboy all down on his luck
He's been through the best of his friends

On a long lonesome highway in an old pickup truck
Crossed Texas like a hot dusty wind

He was all around cowboy back in '49
from the top it's been a long way down
Since the whiskey and ladies started winning his time
They rode him high and hard to the ground

But he remembers the thrill of being a winner
back in the days of his first rodeo
But there was something about winning that didn't last forever
Maybe tomorrow things will get better
if the devil lets loose of his soul
he'll be the all around cowboy again

So he rolls up a smoke and he sips his Old Crow
Wipes the whiskers that cover his old chin
And he grins as he dreams of the old rodeos…
now he's the all around cowboy again



Can readers help me understand the meaning of backwardation vs contango in the past in the ES? Why is it negative now? Does it mean people think it's going to go down, or are the rates that low? I've studied, but don't really understood the formulas for computing the values of the future contracts or why there is a negative spread now when is was +4 points or higher spread in 2007 as the market topped on the rolls.

Nick White lends a hand:

Garden variety futures valuation is just a simple cost of carry model: the price of the underlying today adjusted for the cashflows you expect to pay/receive until expiry. The whole bundle is then appropriately adjusted via interest rates for time — effectively, the exact same as any other asset.

Intuitively, this is easy to understand if you think of how NPV — or a DCF model — works and then team it up with the laws of arbitrage. What is your asset worth today given what you will spend and receive for it over a given period, adjusted for interest rates? If your asset can be exactly replicated, is the price of that replication worth more or less than the original? If so — ceteris parabus — you can arb it.

The proviso to the above is that not everybody has the same interest rate in their model… your cost of funding may be very different to mine, which will be very different to GS's. I would argue that — care factor on Index Arb notwithstanding — one's ability and inclination to practice any form of index arb depends vitally on this cost of funding rather than some point spread in the rolls… and that in turn "depends" on whether the arb is long stock / short future or vice versa. Risk free rates are just a proxy.

So, if you cannot perform index arb… what is this info useful for? Knowing the fair value spread might give you a few ticks edge when placing an order because the future may already be a bit over/under extended vs the cash market. So, to provide an example, if you're buying, you may be better to place your order — per the Chair's admonition — a couple of ticks behind the BBO if the fut is over-extended vs the cash. Otherwise, you might want to lift the fut if the cash has moved and the future is lagging.

Very simplistic — but backwardation and contango are just natural progressions of these pricing models, adjusted for the vagaries of short-term supply and demand.

Steve Ellison comments:

 Philip L. Carret, in his 1931 book The Art of Speculation, considered it very bullish when stock dividend yields exceeded the margin interest rate. In such circumstances, he said, stocks "carried themselves", i.e., one could buy stocks on margin and pay the interest on the loan using dividends. Backwardation indicates that S&P 500 futures now carry themselves.

The S&P 500 futures began trading in 1982 and almost never traded in backwardation for the next 20 years. They went into backwardation in mid-2002 and stayed in backwardation for most of the next two years, advancing 53% during this time. They have been in backwardation continuously since October 17, 2008, advancing 25% during this time.

Russ Sears interjects:

 I have seen some option quotes on Enron, that had calls, same strike, different maturities (I believe it was Oct and Dec maturities) that apparently had some time arbitrage. Not sure they were actionable though. In 2000 I bought some deep deep out of the money long term custom interest rate options, that later became in the money, for my old company. The selling counterparty called in 2003 and begged us to sell them back, because they were very difficult to hedge. He told me they were so far out of the money that they sold them thinking they would never have to actually hedge them. I suspect in both cases the option seller, simply booked the premiums as 100% profit, so the theory really went out the door.

Quant Chicken writes in:

The personal impression I formed when I reviewed the empirical academic literature 4-5 years ago was that the forward is not an unbiased predictor (contrary to the theories of FX I had learned in school). The "forward premium puzzle" has been confirmed using so many different statistical tests (some quite esoteric) that I came to believe there is something to it.

I was getting interested in investing real money in this anomaly when I was dissuaded by wiser colleagues, who pointed out that this "carry trade" idea (borrow in low yielding currencies, invest in high yielding ones) was getting crowded, everyone was getting into it, DB started an ETF to allow public to participate (this was in 2006), etc. And statistically the evidence was not very strong. In retrospect I am glad my friends advised me to stay out of it.



 I haven't read The Big Short, but after seeing the Lewis interview on 60 Minutes it's clear to me the book is quite illogical and contradictory. Somehow that makes it like Gladwell's, the book that the media loves, and will doubtless be the most popular. See the good paragraph posted below from an amateur Amazon reviewer.

As the Chair will testify about the nature and culture of AIG, the most ludicrous claim of all is that innocent, naive AIG was forced or tricked into writing $20 billion of credit default swaps by Goldman Sachs.

What are these points Lewis wanted to make? I suppose the major tension of the book is the teeter-tottering between the greed/evil genius of the major Wall Street firms (on one hand), and then the utter stupidity and incompetence of Wall Street (on the other). It is a difficult balance to strike, and one reason it is difficult is because, well, one can not have it both ways. Lewis can not claim, as he astonishingly and explicitly does, that Goldman Sachs made AIG write credit default swaps on the subprime mortgage industry, guaranteeing AIG's demise and Goldman Sachs flourishing, but then on the other hand claim that the firms had no idea what they were doing, and were completely shell-shocked by what happened to their CDO's (the collateralized debt obligation instruments which served as the toxic assets you hear so much about). This inconsistency permeates the book, and tonight on 60 Minutes I heard Lewis repeat what his major thesis is: Wall Street did not know what they were doing. This is the correct thesis. But it is wholly imcompatible with the obscene Goldman Sachs conspiracy movement that has taken over the Oliver Stone mainframe of our society. Even a Michael Lewis fan like myself was taken aback by the audacity of this oft-repeated contradiction.

Kim Zussman comments:

The better story is not the book but the author. Lewis, a Princeton/LSE grad, had a first career as a successful bond salesman at Solomon. He left finance to become a more successful author, colorizing Wall St villains and others.

"Be the house"

Nick White comments:

I know Mr. Lewis isn't terribly popular 'round here (though I enjoy his writing a great deal - pinch of salt or otherwise)…but I think Kim nailed it when he observed, "be the house". Full marks to Lewis for parlaying his edge. What's more, he's hardly ever been bashful about his motivations or disposition in the industry.

By his own admission, (see excerpt from business week interview below) he seeks to illustrate the issues through characters he (and us) can grab hold of. Sure, it sensationalises the story a bit - but it makes the complexity of all this a bit easier for those who aren't familiar with all the personalities, actors, products and institutions. The only way vast swathes of the non-professional population will understand this mess is through exaggeration, analogy and over-simplification. Hell, even most of those within the industry will probably only understand it this way.

He's also been great in giving credit to people who did the real homework and who have the nitty gritty facts and figures on this crisis– girls like Anna Katherine Barnett from Harvard (see this article and link to her paper there). Maybe it's just me defending the old school tie, but I've been long Mike Lewis for many years and will continue to be. Of course, I've never met him, so I simply take him at face value as an author. Others here may know him from a different angle. To me, he's an interesting and engaging social commentator and, like the rest of us here, can only put his pants on one leg at a time– none of us are perfect.

I, for one, am really looking forward to reading his book. Will surely be better than Paulson's and a nice perspective change from Andrew Ross Sorkin's.

Interview Excerpt

SCHATZKER: You note early on in the book that John Paulson made more money than anyone had ever made so quickly on Wall Street. So why not make him more a part of this story?

LEWIS: I spent time with him. And he was very friendly. I could have made him part of the story very easily. But I had a purpose for this story. And the purpose was I wanted to explain to the reader what on earth had happened. And to do that, it helped that the characters themselves had to learn about these markets, that they didn't understand these markets to begin with.

So the reader could learn with them.

John Paulson happened to be oddly positioned inside the financial markets in that he was one of the few people who made his living shorting bonds and looking for bonds to short. His motives were, to me, less interesting. He's much more a purely economic animal. And so he didn't have a great distance to travel to get to the trade. And in addition I'm writing a story. And the story is driven by these characters. And it's got to be true. I can't make it up. I don't want to exaggerate what this thing means to a character.

The people who I was interested in were the people who had laid it all on the line, where they started out thinking, "A nice little trade," and they'd end up, essentially, that if this didn't work out, their careers were over. And Paulson had very cleverly but, from the character, the logical point of view, less interestingly structured his financial life so that he was going to win either way.

When he went to investors and said, "Give me your money so I can short the subprime mortgage bond market," he didn't say this is a bet we want to make because we're all going to get rich. He said your whole portfolio is premised on this not happening, this catastrophe not happening. Give me a tiny bit of your money and put it in this as an insurance policy. And if it works out, it will be a hedge. And if it doesn't work out, the rest of your portfolio is fine.

So there wasn't a lot at stake there. He made a lot of money when it worked out. But he wasn't set up to be in a lot of trouble if it failed. And I was particularly interested in the people who were set up to be in a lot of trouble if it failed.



 May I recommend the works of the following European/ Nordic Jazz trios…I've been exploring them of late and found them to be highly enjoyable. Very much recommended for late night trading, relaxing, or city gazing. A nice Bordeaux or good whiskey will complete the picture for those so inclined.

Each of these trios perform wonderfully abstract works; plenty of space for each tone and brush stroke to make its presence felt. The improvisational conversations peppered across each album are most enjoyable. I even very much enjoy ECM's cover art/ photography– and I have no art sensibilities whatsoever.

All of the below are on the ECM label, and are on iTunes etc.

- Tord Gustavsen Trio - Rec'd albums: Being There / Changing Places

- Marcin Wasilewski Trio - Rec'd albums: January / Trio.
- Tomasz Stanko Quartet (trumpet the addition here)- Rec'd albums: Lontano

As for the classics…in my opinion it will always be near impossible to beat the sheer, breathtaking optimism of a Beethoven Piano Concerto (1 and 5 esp, Brendel or Argerich at the keys), or the pure intellectual horsepower and delight of the Bach Cello Suites (Rostropovich) or his Well Tempered Clavier (Barenboim). Also tough to beat the depth of gloom and rage in Shostakovich's 10th (BPO w/ HvK conducting), or the magic tone colour of Rattle conducting the BPO's performance of Debussy's La Mer. Any expansions and recommendations on this theme would be much appreciated and enjoyed.

Rocky Humbert adds:

Don't overlook John Cage's 4'33" (1947). This
remarkable composition — although infinitely deep and complex –
requires no musical ability to perform perfectly. Sadly, it never made
the on-air playlist of the now-defunct WQXR radio.

I find the final crescendo and coda especially appealing. I couldn't sleep last night as the theme kept going through my head.

Rocky Humbert, quantitative analyst, speculator and master chef, blogs as OneHonestMan.

Tom Marks comments:

Regarding John Cage's 4'33", the thinking is that the "piece" can never be "played' the same way. The reason being that nothing takes place in a vacuum. That is, there will always be ambient sound about: The periodic shuffling of the audience's feet, the random if predictable clearing of somebody's throat, the fingering of programs, etc. What Cage intended was clearly more an ontological statement than it was a musical composition in the traditional sense, and for that effort it might not be entirely without merit.

The last time I thought about 4'33'' and the notion of relative nothingness was when I had occasion to consider something as seemingly disparate as disk space on a computer and how sometimes 0 = 0, and sometimes 0 ≠ 0.

So in keeping with Cage's thesis, how can nothing (i.e., 0) not necessarily not be nothing?

A little 5 minute experiment for those so inclined.

Go the the Windows Start Button, go to Accessories, and go the no frills text editor, Notepad. Open it up, type the following two lines in the body and save it to the desktop as Test 1:

Mary had a little lamb Its fleece was white as snow

Then do the same thing again, this time putting nothing at all in the body of the Notepad document and save that one as Test 2.

The go to the Start Button again and use Windows Explorer to find the Notepad documents. Where they are listed it will indicate their respective sizes; 1 KB for Test 1 and 0 KB for Test 2.

(1 KB sounds like a lot of space for only two lines saved but storage on computers is done in blocks or clusters, leading to much unused space. 1 KB is the minimum size that Notepad can save something as recorded by Windows Explorer. Don't worry about that part, just the figure.)

Now while still in Explorer right click on Test 1 and scroll down to Properties, click on it and in the middle of the window that pops up will be two more figures, Size: 52 bytes (one byte for each of the characters, spaces between words, and 2 for the line change ) and Size on disk: 4 KB (the parameter of the cluster in which the NTFS will save something to disk. Don't worry about this part either. Again, just the figure.)

This all seems logical so far, as Explorer somehow showed us 3 different size figures for the same file, 1 KB, 4 bytes, and 4 KB, but all for clear and different reasons.

Then do the same for Test 2 — in which nothing at all was entered into the body of the document — and accordingly Explorer indicated that its size is 0. Right click on it, go down to Properties, and review the 2 additional figures: Size 0 bytes; Size on disk: 0 bytes.

After all, why not, there was nothing there so why should "nothing" take up any space. Accordingly, it was just demonstrated that the 3 different space figures for the blank Notepad file, Test 2, each indicated 0.

Now here's where Cage's 4'33'' rears its head.

It would logically follow to most, it certainly did initially to me, that other blank files similar to Notepad's Test 2 — that is, nothing at all in the body — but stored in other applications such as Word, Excel, or PowerPoint would also reflect those three 0,0,0 figures that Explorer showed us for Test 2. Would seem to make eminent sense.

But perhaps as Cage would argue about his silent music, context is sovereign if not everything. As such those three blank files would show the following varying sizes:

Word: Explorer: 24 KB Properties Size: 23.5 KB (24, 064 bytes) Size on disk: 24 KB (24,576 bytes)

Excel: Explorer: 14 KB Properties Size: 13.5 KB (13,824 bytes) Size on disk: 16 KB (16,384 bytes)

PowerPoint: Explorer: 8 KB Properties Size: 8 KB (8,192 bytes) Size on disk: 8 KB (8,192 bytes)

Regarding the seeming "nothingness" of a blank file, Notepad obviously has a different idea of a vacuum than the other three applications do. As those three do of each other.

The answer lies in the respective pedestals of already existing data on which the blank Word, Excel, and PowerPoint files lie. These are far more robust and intelligent programs than Notepad. Regarding their baseline file sizes, there is something almost Cartesian about it: The underlying program can think, therefore its blank file size is. At least is more than 0.

Likewise, perhaps Cage would argue the ontological point that it too would be impossible to separate a "performance" of his 4'33'' from the context of where it took place without leaving some sort of footprint. He just couldn't empirically quantify it.

That said, Cage's aesthetic and oeuvre are clearly not for everybody. Four a half-minutes of silent music make for a pretty thin gruel most would argue, but in fairness he wasn't absent of ideas. But the McLuhan notion of "the medium is the message" is one thing; the medium swamping the messsage, another altogether.



EinsteinI came across this article on Bloomberg:

"End-of-Life Warning at $618,616 Makes Me Wonder Was It Worth It" by Amanda Bennett

It is the story of a wife who assisted her husband through a long story of pain, hope and money spent to prolong life as much as possible. It is interesting how time has a different value when you realize your life is coming to an end, and when you understand time has become a scarce resource.

Rocky Humbert comments:

Using 2005 data from the March of Dimes, the average pre-term birth costs $51,600 and the first-year medical costs are also about 10x greater for a premature birth versus a full-term birth. This is a lot of money because pre-term babies make up over 12% of American newborns. Amazingly a 2-pound baby now has a 95% probability to live a full and happy life. (Admittedly, some of these babies are permanently impaired and cost fortunes in lifetime medical costs.) Nonetheless, forty years ago, the probability of survival of a 2-pound infant was close to nil.

I bring this up because I like to focus on the positive, and truly amazing advancements in medicine have been achieved over the past decades. Polio, anyone? One of these "expensive" pre-term or in-vitro babies may be the next Einstein, and far be it from me to argue for "pulling the plug" on Einsten at age 0 or Einstein at age 100. Theoretical analysis ignores the infant mortality side of the spectrum. If one can theorize immortality, one should also theorize about the extraordinary efforts and money to reduce infant mortality and increase fertility. Why should one assume that an immortal man does not father hundreds of children? And why cannot elderly women have more children too? Hence rather than reaching the conclusion that the ratio of elderly/young would be unsustainable, one might reach the conclusion that the overall population would grow uncontrollably– perhaps with Malthusian consequences. Which of course argues that we need more Einsteins…

Nick White responds:

One needs only to consider that the march of mankind over the past 6,000 years has been generally forward. Hence if one extrapolates this trend, one is likely to conclude that as human population grows (ceteris paribis), there is more good than evil. A triumph of the optimists…I'm not so sure on this one.

Generally forward? Well, yes. But that neatly sweeps under the carpet vast swathes of humanity who may be net no better off (or possibly worse) than they might have been 6,000 years ago. Certainly, for everyone on this list, life is many orders of magnitude brighter than it was all those generations ago. Yet, overall, I would argue there's quite a bit of skew in the distribution of benefit; largely depends on what region of the world you're in and what ethnic group you hail from.

Is there more good than evil? I think this is another proximate vs. ultimate causes issue. I would argue that rational self interest (ie "greed") provides many collateral benefits– but is that intrinsically "good", and who decides? That depends, inter alia, on one's theology (or lack thereof). Generally speaking I'm short human motives, but long on some of the products of those motives!

Economically speaking, I think the progressive pattern you've identified is perhaps something approximating an unintentional Nash Equilibrium– society at wide has benefited as people have done what was best for themselves in the context of their group….but, on average, I think many people were out for their own end. (nb: of course, your example of Salk etc is duly noted, and there are numerous examples of truly beneficent altruism amongst the pantheon of social contributors) All said and done, I think Gekko sums up my position best, and I think it does capture the evolutionary spirit. It's just the side effects one must pay heed to and much of the colorful debate on this list goes back and forth on that very point; we all agree on capitalism– some of us disagree on appropriate social conscience. 



I'm looking for some new/better ideas on how to calculate the vig in ETFs, versus the vig in futures, versus the vig in the physical.

Bill Rafter replies:

Not all ETFs are taxed identically. Specifically the inflation-averse would be warned that GLD is set up as a grantor trust and not as a 1940 Act fund. Profits in GLD are taxed as collectibles.

This points out that "structure matters". For example if you own an ETN (note) rather than an ETF (fund) you are subject to counterparty risk. Some people have chosen to gloss over the distinctions and refer to them all as ETPs (products), and that homogenizing tends to mask the counterparty risk. For example, LEH had issued a few ETNs whose owners are now waiting in line with all of LEH's other creditors. Barclays is the counterparty on INP (ETN representing India), which presumably would be okay. But why take the chance when you can buy EPI, the Wisdom Tree offering which is a true ETF?

How do you find these things out? Read the prospectus, something very few do anymore.

Nick White writes:

Deep and mysterious are the secrets that one can behold if they are willing to brave the legalese, break out pad and paper and delve into these sometimes fantastically structured products.

Rocky Humbert comments:

There were/are a whole load of those ETNs out there — additionally, the IRS issued a ruling about a year ago that changed the tax treatments for the currency ETNs. Currently, some of the narrower futures are under scrutiny by the IRS, and some foreign (unregulated) futures don't qualify for Section 1256 at all. Another example of the hazards of the ETFs are also the changing CFTC rules regarding position limits — which caused the UNG and USO to diverge from their NAV. At one point the UNG was trading at a 19% premium to NAV. If one is short the ETF, one cannot redeem the position, so there is no theoretical limit on how far the premium could go. In contrast, if you buy the ETF at a discount, you can always redeem it and close the arbitrage to the underlying. 



A VeltmanThis phenomenon cannot be denied, if one simply eye-balls the daily charts over the past year. I hypothesize that as the co-relation has become more-widely observed (and embraced as an automated trading signal), it partly became self-fulfilling and re-enforcing. All simple trading ideas follow their learning curve and eventually suffer from over-crowding; this one appears to be at its pinnacle right now. There are two main propositions to consider:

1. Which precise instruments to choose: SP vs. HG, SP vs. AUD/USD, SP vs. AUD/JPY, Nikkei vs same, etc.

2. Pinpoint the causality, i.e. which leads the other; and, possibly in what time-zones and under what special circumstances.

Empirically, I have long noticed that when North-American activity is somewhat curtailed due to holidays or snow-storms, the Australian Dollar moves that precede North-American time-zone will in fact tip the US stock market direction. A very hard to swallow idea: given the enormous size of the US Equities arena. On the other hand, if one's philosophy is that markets move more on perception than they do on reality - then why not?

It's also very important to incorporate varied leverage into your model. In course of 2010, for example: trend runs in outright percentage terms were greater in currencies than SP; and twice as big in Copper than SP! If you further add the effect of widely used 100:1 Forex trading leverage or the high leverage of Copper futures - results are even more outrageous… This is where Theory of Reflexivity may enter near market crests, and those leveraged bets will cause "fundamental reality" to succumb to speculative forces.

Phil McDonnell writes:

To investigate Mr. Veltman's conjecture it might be helpful to do some counting. Looking at SPY relative to the copper ETF JJC and the Australian dollar ETF FXA showed the following coterminal 105 day correlations:

        SPY JJC FXA

SPY 100 60% 71%
JJC  100 71
FXA               100

Clearly the simultaneous relationships are strong and positive. But to trade we need a predictive relationship. Looking at the same vehicles but lagged 1 day for FXA and JJC we get the following correlations to SPY the next day.

SPY JJC 0% FXA -7%

Both correlations are insignificant. Neither yesterday's move in JJC or FXA is any help in predicting the next day's move in SPY.

Nick White comments:

I echo Dr. McD's analysis. There are far too many players joining the dots between AU index — resources stocks — AU FICC without any real (well, "real" as how most Dailyspec readers would define it) reason to.

Anatoly Veltman adds:

This was yet another in the series of testing accidents, this time from esteemed Dr. McDonnell. Where would anyone get the idea to lag Australian action by a calendar day, before impacting North American S&P? And if you switch the lag around: that's not the causality hypothesized.No surprise here: for any test to be meaningful, considerable resources are required to set up proper test. Usual handicap: quants are not precise in coding trader's idea.

I originally described this idea in connection with the previous Feb.10 snow-storm. Price action could not have been more clear: Australian Dollar strength led the eventual "surprise" intra-day upside resolution in (hesitant) North American S&P, many hours in advance. S&P's (technical) up-trend then lasted for days! But how will this ever be coded… 



Statistics without TearsComing to you live from Borders, it seems Derek Rowntree — of 'Statistics Without Tears' fame also has a text, 'The Manager's Book of Checklists'.

It looks thorough. An interesting overlap given DailySpec's statistical bent and recent discussions of checklists.



 A daily loss of 2%, erasing this year's gains, is nothing compared to the political and cultural shift that happened today.

The following is not meant to be romantic — simply a reflection of my feelings on today's news, nothing more.

Many readers of this site have been attracted to bank prop desks, "sponsored" hedge funds and merchant banking as career paths. Much of the attraction to these roles was because of the enormous entrepreneurial opportunities and intellectual satisfaction offered by such lines of work. I would say, for the right types of people, the net compensation was just a side benefit to the job satisfaction and freedom.

That the wholesale writeoff of a great economic engine has happened in the United States — of all places! — is truly sad and cause for great concern. What has happened to the nation that has posessed the birthright of capitalism and opportunity? Why has it now seen fit to discard one of the very engines that made it so powerful, respected and venerated? This is the nation that has produced, for better or worse, such (financial) cultural icons as Wall Street, Liar's Poker, the legend of Soros and the Sage, of our very own Chair — and now it has turned round to bite the hand that has so often fed its dreams. Such a move would have seemed unfathomable in 1985, 1995 or even 2005, yet here we are.

So a few thoughts and anecdotes:

1. PL is pure. There's no fudging performance. You are graded in the market every day by an unusually rigorous and ill-tempered teacher who never gives praise lightly. In trading, one cannot hide behind a sharp tie and a nice suit, cheap talk or family connections. It's entirely on one's own shoulders how one performs. Every day, every week, every year the bottom line is green or red and you own it. To discard and stigmatise such objectivity is a blight to reason itself.

2. I have had the privilege of working in some of these banks - the cultural and geographic diversity in the average internal hedge fund is deep, very often scholarly and high in camaraderie and positivity. The backgrounds are varied and are cause for many profitable interactions and learning. Many bank prop traders can come from the darkest, most depressing areas in the world and - with hard work and effort - transform both their own lives and the lives of those closest to them. Sure, there are the odd bad apples and obnoxious, attention seeking loudmouths - but what line of work doesn't possess such types?

3. Duly noted that there ought to be new, well thought through, sensible regulation; this should be of little concern if done properly. The best players want the most level playing field because they enjoy the challenge of playing within the rules and having security that everyone knows where they stand. Perhaps these new rules should focus on the leverage used by an institution as a whole rather than simply singling out particular activities. Was it really prop traders / internal hf's to blame for this crisis? Or were balance sheets leveraged 30-40x a more likely villain? Or, in the alternative, why not require higher professional standards and testing? Doctors and lawyers spend many, many years taking qualifying exams with very high vigs which encourage and ensure a largely compliant and responsible membership. Perhaps, if one handles client money, there ought to be far more extensive educational and testing requirements (perhaps having completed a professional qualification like the CFA first)? Not a solution, but at least helps to raise the professional standard and provide disincentive to those out for the quick buck.

4. Why not go after the media? Media - especially in the United States -is constantly selling people dreams that are near impossible for them to achieve given education, skills and income. Why not ban shows like MTV's Cribs that encourage poor economic behaviour? Why not ban any form of lifestyle TV programming? Why allow seductive ad campaigns? Is it more irresponsible to glorify and encourage conspicuous consumption, or to attempt to facilitate people's dreams (however foolish or unlikely) via the transference of risk? An open question for the reader to ponder.

5. Will taking speculative risk from banks and placing it in the hands of hedge funds or private investment vehicles alone really protect the world from financial calamity? Have we forgotten LTCM? What about counterparty risk? It's not so long ago that rafts of good hedge funds had to liquidate and pile in on the selling - not because their own performance was bad - but because the bad performance of others forced redemptions that sank them. 

6. Efficient use of capital. Much of the general public prefer to have the professionals do the thinking for them in complex matters - fair enough. If someone wants a (relatively) risk free return, they can have it for 3-5% a year….problem is that such a return is not particularly sexy or accelerative toward Ferrari ownership. The real problem is greed and overconfidence - a 25% return sure sounds good - but the concept of the variance required to achieve such returns is, at best, largely ignored. Banks and financial institutions are able to help facilitate financial goals by (theoretically) making good decisions with capital that is otherwise sitting dormant on their balance sheets.

7. Redundancy of capital, systems and process is key; not knee jerk reactions. More slack needs to be built in at all levels of the economy. People ought to save more. Risk takers ought to carefully consider their use of leverage and have more of a buffer. Risk methodologies need work. Shooting the messenger has never, to date, had much historical success in solving anything. All of the above would be nice, but I'm just old enough to appreciate that dreams are free. 

8. A conversation with a fellow spec this morning helped to crystallise in my mind that envy and resentment are not mutually exclusive. The evidence of such is all over today's news.

I thumbed through an old copy of Liar's Poker this morning. Maybe tonight I will watch "Wall Street". Sure, they're cheesy and it's silly. But it's like saying goodbye to someone I might not see again.



 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.



Colt McCoyIs the current situation in Bama / Texas useful for analysis of markets?

What happens when a critical leader gets taken out of the game? What's the correct analogy? Perhaps Apple's being found guilty of accounting fraud, or Goldman Sachs's having a rogue trader with a multibillion loss?

If there is a negative effect, does this occur more often to leaders who have proven extremely resillient in the past (just like McCoy going into today's game)?

What about the relative strength of the opposition against the lost leader's strengths? (McCoy leads a brilliant offense that was otherwise weak; whereas Bama's defense is strong and aggressive, exacerbating the subsequent mismatch). Certainly, if GS went down, one might not be foolish for thinking, given current market sentiment, that it would have more of a negative impact than, say, Johnson and Johnson's going down ?

Lots of good material there…

Also interesting to see Texas's intial disposition coming out of the gate, vs the sight on the field now.

Many Olympic level coaches are able to pick who will win a sporting event — any sport, not just their own — by reading the expressions of the competitors on the starting blocks. I am sure there are useful parallels. I'm reminded of the Chair's exhortation to know the basic effects from the game face of the market each day: Up Yesterday / Up Open, Down Yesterday / Up Open, Up Yesterday, Down Open, Down Yesterday, Down Open.



 I'm sure you all will be able to come up with some brilliant daylight-robbery stories around Christmas tree scalping. I have one to share that provides some nice little trading lessons.

Over the weekend I visited a large market in one of the more rural suburbs of Sydney to find a tree. Now, being a big kid, it just doesn't feel like Christmas to me if my tree is smaller than I am…which would be fine but for the fact that I'm 6'7". This means I am used to getting gouged on large size trees, but I'd never come across dudes who were more shameless than some characters I met on the weekend.

Walking onto the premises, my wife and I scoured the lot for suitable trees. We picked out one that we liked and one for my mother, too. We found a sales assistant and asked him to quote us a price including delivery. He quoted us AUD120 each - insane - so I began to talk him down using my various tactics. However, his supervisor and the lot owner were nearby. They sensed a big sale and wandered on over…all smiles. I tightened my grasp on my wallet and prepared for the worst.

"So, friends, how much have you been quoted for these trees?" asked the boss. "You guys are dreaming at the prices I've been given" I replied. "Well," says the supervisor, "it's been a tough year with the droughts and all - and, as you can see - (all smiles) it's a very busy day out here…but as you want to get a couple, let's see what we can do". Boss's antennae are up now: "How much did the assistant ask for?". "One twenty each" I said.

Supervisor goes into hyperdrive…"One twenty? No…they're one-eig…" Boss nudges him and interjects, "They're all two-fifty".


Not even in the options market have I seen a markup of that magnitude appear so fast when the chance of getting lifted approaches one.

"Are you guys serious?", I said. "You're crazy…you honestly expect me to pay that now? You're seriously going to move the price that much? I'll pay you 90 each for all of them, and that's being very full of the Christmas spirit". He actually scoffed at me.

"You guys must hate money", I said as we turned on our heels and made for the exit. Usual comments from them about being cheap etc etc.

We left the lot less than thrilled with what we'd encountered. However, driving about 2km down the road we saw a sign for fresh trees on a small, family owned farm. We went in to see what was on offer.

The family were really lovely. They had much nicer trees and quoted us 70 for one, and 50 for the other…including delivery. I lifted him straight away and paid the guy an extra 30 on the spot and wished him and his family a very happy Christmas.

it's rehashing an old lesson but, with repetition being the mother of skill, it bears repeating again: there is always a better price if you are willing to hunt for it, and the best deals are always where you least expect them. Stay away from crowds…the vig reacts to crowds on a mission like water molecules reacting to heat.

Finally, it occurs to me I might still have been fleeced…perhaps there was collusion between the big lot and the small farmer??? Institutions may quote overs on a price so you go deal with their smaller subsidiary or soft-dollar market maker…who is still killing you, but you're so glad to have just avoided paying the big ticket that you'll still happily pay overs while your defenses are down.

Also, makes one wonder if there is a world Christmas tree index much like the big mac index? With AUDUSD at .914 I will be interested to hear from you all if there are any arbitrage opportunities in this very lucrative market! …surely couldn't cost much more than AUD5 bucks to raise a tree on a farm anyway?



The Blind Side

The Blind Side is one of those movies that makes life worth living forever. What other such movies, plays, music, literature would you put in that category?

Vince Fulco replies:


The Road to Perdition– everyone who participated in it was at the top of their game from writers, actors (primary & secondary), producer, director, cinematographer, musical director. It made for a polished period piece with tons of emotionally charged moments and an unexpected ending.

Boondock Saints– obscure, independent type movie; very novel story telling seen both by the vantage point of the perpetrators (Irish Mob in South Boston) as well as the talented detective trying to unravel a recent flair-up in gang on gang activities (Willem Dafoe). A great example of the grey areas in life; i.e. if you are using extreme violence against a rival gang to protect one's innocent neighborhood residents, are you a saint or sinner?

Gandhi– A masterpiece in so many ways, no more needs to be said.

Laurence of Arabia– ditto.

I am a sucker for underdog movies where the lead character rises from his own self involvement and selfishness to sacrifice everything for the greater good. Not 'Laurence'–obviously his striving for personal greatness led to its own extraordinary achievements but as I get older, the accomplishment of creating these complex, grand movie projects is inspiring in its own right.


 Shogun by James Clavell

Anna Karenina

Two monumental undertakings by the authors which fully develop their characters and keep the reader engrossed from cover to cover. As for the latter, although it has been years, as I recall, the ability to interweave multiple complete stories and have them entertaining and believable was sheer genius.


Anything by Yo-Yo Ma and separately Tan Dun.

Nick White responds:

 Martha Argerich's rendition of the first movement of Rachmaninov's 3rd Piano Concerto with the Radio Symphonie Orchester Berlin and Riccardo Chailly conducting.

Her magisterial expression of the full range of human emotion in this performance is, in my opinion, unparalleled in any other work.

Thomas Miller adds:

Miracle on 34th Street and It's a Wonderful Life. Both made shortly after end of WWll. Still immensely popular 60 + years later.

Jeff Watson writes:

"Surfing for Life", is one of those special movies that makes one want to live forever. That's the movie that deals with all the old people who still surf well into their 80's.

James Lackey writes:

Cinderella Man (2005) …. Crowe as Jim Braddock is a good one. Invincible 2006 Wahlberg plays Based on the story of Vince Papale, a 30-year-old bartender from South Philadelphia who overcame long odds to play for the NFL's Philadelphia Eagles in 1976..

Ironic, I watched It's A Wonderful Life with my kids last night. What cracked me up is my quest to please my wife.I  remember 10 years ago when my boy was 4, I said "you're a bad boy" she said No no no what he did was bad, he is not bad. Ever since I have been working on my syntax to get the exact same point across with out damaging my own kids for life. ha.

Yet in It's A wonderful life the mom calls her sons idiots. It cracked me up as she was kidding sit down and eat you two idiots. The druggist smacked little George Baily around for being lazy. Baily tells the biggest backer and connected man in the county off countless times..turns down a 10x salary increase because he knew it wasn't best to sell his beliefs for money, but all the while hating his town his nickel and dime business where he cant profit much by helping others. He complained all along..which was hilarious "trapped"

Man on Porch: Why don't you kiss her instead of talking her to death? George Bailey: You want me to kiss her, huh? Man on Porch: Ah, youth is wasted on the wrong people.

George Bailey: Merry Christmas, Mr. Potter! Mr. Potter: And Happy New Year, In Jail! They're At Your House Right Now!

George Bailey: [yelling at Uncle Billy] Where's that money, you silly stupid old fool? Where's that money? Do you realize what this means? It means bankruptcy and scandal and prison. That's what it means. One of us is going to jail - well, it's not gonna be me.

Mary: I feel like a bootlegger's wife!

Stefan Jovanovich writes:

 It's A Wonderful Life is certainly popular now, but it was a bust at the box office when it was released in 1946. Its flop effectively ended Capra's career. The actors - Jimmy Stewart, Donna Read - went on to further success; but the plot reminded people of the bank runs of the pre-War era (hardly a happy memory) and they stayed away in droves. The Best Years of Our Lives was the hit that year; it was (among other things) about a banker who returned to work from the war and decided to lend a farmer money, not about depositors clamoring for their money back from an over-extended S&L.

Nick Procyk adds:

I would second Cinderella Man and Invincible.

March of the Penguins is a true-life movie about a group of emperor penguins that survive the harsh polar winter, breed, search for food — all captured in amazing photography.

Eight Below is another heartwarming movie based on a true story about a guide and his eight sled dogs. The guide is driven to reunite with his canine friends after they were stranded in Antartica during the brutal winter. It's a wonderful story about friendship, courage, and faith.

Riz Din writes:

 The Rocky films, all of 'em. I guess they just caught me at the right time. The first is the best, and Balboa doesn't even win the final bout. His victory is of another sort. The rest of the series works on several levels. You have both the quality of the Rocky films and Stallone's actual career ebbing and flowing with the ups and downs of Rocky's character. The score is everyone's 'go to' music when they want to get pumped up and motivated, the dialogue is wonderful, the characters memorable, and there are many lessons that can be drawn from the storyline, both good and bad.

From the first film:

Rocky: I been comin' here for six years, and for six years ya been stickin' it to me, an' I wanna know how come!
Mickey: Ya don't wanna know!
Rocky: I wanna know how come!
Mickey: Ya wanna know?
Mickey: OK, I'm gonna tell ya! You had the talent to become a good
fighter, but instead of that, you become a legbreaker to some cheap, second rate loanshark!
Rocky: It's a living.

John Lamberg writes:

Life worth living forever? Well, none of the following make that cut, but my favorites are:

Hans Christian Andersen's works. (The Little Match Girl is perhaps the saddest story I ever read, and it stuck with me since childhood. We'll see if Gregory Maguire's "Matchless", a re-imagination of the story compares.)

Holst, The Planets

Bodysnatchers (original)

Forbidden Planet (not for the acting or script, but for Dr. Morbius' secret)

Vincent Andres adds:

The Last Kings of Thule - Jean Malaurie, about ordinary heroes

Many of Giono's books, eg Regain - J. Giono (in french onl)

Many of Pierre Magnan books 

Dava Sobel's Longitude

Order Out of Chaos by I. Prigogine

L'imprévu by I. Ekeland (in french only)

Des rythmes au chaos by P. Bergé, Y. Pomeau, M. Dubois-Gance, 1994.

For pointing an interesting trail, Deep Simplicity: Bringing Order to Chaos and Complexity by John Gribbin.

The Foundations of Ethology by K. Lorenz 

Studies in Animal and Human Behavior  by- K. Lorenz

The First Three Minutes: A Modern View Of The Origin Of The Universe by Steven Weinberg 

Mon oncle d'Amérique by A. Resnais (in French only)



 Much has been said of the behavior of Elizabeth Lambert during a women's soccer conference tournament game against BYU. For my part I find it shocking that a college student can behave with such shameful form and somehow think that it is acceptable. What kind of coach allows this? How do parents raise a child to such an ignominious state? ESPN clip on YouTube.  NY Times article.

Nick White comments:

The BYU girls played a good strategy. I know nothing about these teams, but I'm imagining the delightful Elizabeth would have been identified prior to the game as one of New Mexico's key players and likely worth containing. BYU either knew or quickly discovered that Lambert had a temper, so they kept taunting and provoking her, knowing full well that she would likely respond more violently and graphically and get herself removed. In other words, BYU perhaps couldn't contain Lambert through their play, so they used her own proclivity for reaction to get her to take herself out. This is a useful tactic.

I would also bet that Ms. Lambert is one of the more forthright, driven and ambitious players on her team. People who take themselves more seriously are easier marks for this kind of tactic. The rigidity of their internal value system causes them to respond disproportionately to the perceived offense.

How often (perhaps intraday) does this very setup show itself in the market?



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!



While students at [US elite colleges today] are smart, gadget rich, and Internet sophisticated, they don't seem to use their opportunities in any meaningful way. — A 1971 Yale graduate.

In my recent experience, the university professor who is willing and able to encourage original thought and work (especially at undergraduate level) is exceptionally rare. I've found academic staff to be very supportive of extra-curricular academic effort, but they will not reward it on the test. The final grade is for depth of regurgitation and some ability to manipulate that knowledge to circumstances, never for originality or poking flaws in straw men and pet theories.

It's economics, though — all the employers at the most desirable jobs filter interview opportunities by grades. One's not going to get a gig at XYZ bank, firm, consultancy etc. unless he can pony up the threshold competencies as they see it.

This reinforces T@leb's argument that life is becoming over-optimised, reducing the slack in the system that's necessary to absorb the impact of the unforeseen. I have seen this myself recently, having interviewed a kid who was near top of his class at IIT and IIM, top of his class at a top tier MS in quant finance, straight As and a bonafide mathemagician. But he had zero intuition about the mechanics of the market, the vig or anything else. Everything was an equation to be solved where one simply cranks the wheel and spits out the answer.

We're getting more and more book smart kids, and fewer street smart ones. There's a happy balance between the two somewhere but, for now, society rewards following the formula…

Jeff Watson replies:

As long as there are streets, there will be street-smart people.

Apparently, every generation has had problems with the succeeding generations. This has been going on for thousands of years, and the obvious, upward drift of mankind has been missed by the elders. Somehow, I think the next generation will muddle through and the upward drift will continue.

"The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households. They no longer rise when elders enter the room. They contradict their parents, chatter before company, gobble up dainties at the table, cross their legs, and tyrannize their teachers."

Attributed to Socrates by Plato



D KrallThe delightfully breathy Diana Krall is currently performing on her "Quiet Nights" album tour. We saw her perform last night at the Royal Albert Hall here in London.

En route to the venue, as we slid through the sparkling, fall evening lights of London, it occurred to me that jazz is a perfect musical accompaniment to speculate to — rich in subtleties, full of improvisation, balancing the emotional within the logical, frequently changing rhythms, timbre and metre — all those familiar elements are there. Last night, Ms. Krall repeatedly demonstrated her mastery of the form in a thoroughly authentic and slick two hour set.

I've seen a lot of artists and genres perform at the Royal Albert — everything from choristers, to the Proms to hip-hop star Jay Z. From those experiences, I've found the Royal Albert really shines when there is an impressive wall of noise emanating from the stage, so, in this case, I wasn't sure how the subtleties of jazz would work out. Would those little nuances be engulfed by the high ceilings? Would those critical rasps be lost to any others but those in the front row? As it turned out, I had nothing to fear.

Ms. Krall used the venue to great advantage, taking the audience from up-beat tracks like "I Love Being Here With You" and "Let's Fall in Love" to the deeply heartfelt "A Case of You" with equal facility. Indeed, in the case of the latter track, it was sung with such soulfulness I was left wondering how many tears Ms. Krall must have cried when she first heard it, or sat at the keys to make her own interpretation of it.

All this was complemented by the fact that she played with a small, intimate trio, rather than bringing along her usual Clayton/Hamilton backing orchestra. Each of the supporting artists was given ample opportunity to showcase his talent, and each made the most of the opportunity in front of an appreciative crowd.

The "Quiet Nights" album is meant as a love letter to Krall's husband, Elvis Costello, and her performance really reflected that intention. It was soulful at times, joyful at others and always intimate. This was heightened with lively anecdotes about her family, her influences, her children and her life, appropriately interspersed with each track. She is now touring throughout Europe and Australia and I would highly recommend attending to anyone who is a fan of the genre.

Y BrownWhile Diana Krall was outstanding, the highlight of the evening for me was YolanDa Brown, a young UK saxophonist. Ms. Brown played the warm up act, but really stole the show. Though a little bit nervous at first, her stage presence was brilliant and interactive — both with her supporting trio and the stiff UK audience. She launched into a performance of great virtuosity and individuality that was frequently mixed with vivid, scene-setting stories and personal comments on her interpretation and influences. Combined with our bottle of champagne, excellent stage mood-lighting and an intimate set list, we found ourselves very much under the spell of her efforts. Ms. Brown's performance was deliciously "off the shoulder", and I am sure her music inspired many in the audience to purchase her work for future romantic assignations.

The greatest compliment I might pay to Ms. Brown is that she made my wife and me feel like we were the only people in the room. In a packed Royal Albert Hall. She was that good. Get along if you can, but buy one of the albums irrespective. I certainly will enjoy listening to it during those late night, red-eye trading sessions where I needs to keep my cool.



President Obama has just declared the H1N1 virus a National Emergency [in the United States]. Dr. Janice Dorn

I must say, during the Australian winter, there was a huge fuss about swine flu…the popular media were all over it and screaming alarm due to its rapid spread. Now I'm in the northern hemisphere and watching the pop media up here do the same thing.

In Sydney at least, the reality was that so many people ended up getting it without consequence that it just faded off everyone's radar. In fact, at one point, many of the health services said, "If you have flu symptoms, you probably do have swine flu and just treat as usual". Some schools were shut down for a short period but, to my recollection, there were no serious, adverse consequences of this virus in the general public. However, having said that, pregnant women definitely seemed to be more adversely affected and there were some deaths amongst the aged (but whether they might have died even if they'd caught garden-variety flu is up for speculation).

People in my office had swine flu, friends had swine flu, a couple of extended family members had it - but no one of average health and constitution was more sick than if they'd had regular flu.

I'm not a doctor, nor do I wish to be flip about all this so, of course, I defer to those with the expertise and have seen / done the appropriate research. I mention this just to give some anecdotal "evidence" / hope that we're not all doomed. Furthermore, I've seen this virus do its thing through a major population centre and people weren't dropping like flies.

Additional Reading

I was very interested to read the Surveillance Report [20 page pdf] from the Australian Gov't health service regarding the national experience of swine flu to the present day…

I found there to be numerous helpful observations within. I highly commend reading of the full report and draw particular attention to the statistical tables and charts beginning p. 10 et seq.

My thanks to Dr. Dorn for keeping us abreast of developments as they occur. I would also be interested to hear of how the Australian figures compare to US observations (esp. re susceptibility of indigenous population) as things progress.

Also, worth reading is the Q&A about H1N1 Flu at the CDC based on  NEJM data.



KahnemanEveryone who has thought about it knows that behavioral biases of Kahneman and Tversky et. al. are completely contrived and not really biases at all but rules of thumb people have developed to help them take the path of least resistance or save time or expense or make a buck fast. But what are some real weaknesses or tendencies that people have that affect their behavior that could be useful to know?

I am thinking for example about what they say about men — that 3/4 of the way through a lecture, 80% of the men are thinking about romance etc.

I find the tendency of partner discord around Valentines Day a real effect, or the tendency of people to get angry before they've eaten ([(this is due for example to the influence of parasites such as p. gondi on people who have cats — it affects only 25% of the population, although everyone I know gets afflicted by this tendency, also including the much reduced personages at this office, as I noticed at noon today)]).

Also, the tendency to be joyful at having one's losses turn to break-even, or worse yet, the tendency when a loss turns into a small profit, to be so joyful that one can't take a reasonable profit, or much better the tendency, all too rare, to be complacent when one has a good profit and it turns into a fair profit.

The tendency also, for time to pass so quickly when one is involved in a flow activity (all too rare) and for it to drag on endlessly when one is — well, I will not complete that.

What are the real psych weaknesses of behavior that people have that should be quantified, rather than the ones that win you a Nobel Prize for being p. c. and that you can run on college students for a buck?

Alston Mabry says:

There is what I like to refer to as the "one-way street" bias: Whatever I do that disadvantages someone else is perfectly justified given the circumstances; but when some else's actions disadvantage me, it is an outrage.

The most obvious use in public discourse is to determine who is long and who is short on any given issue.

James Sogi reports:

I am reading one of the most fascinating books ever on game theory. The underlying idea is that people all act in their self interest, such that it can, and has been quantified. Game theory offers a good alternative model to the statistical model and avoids the problems inherent in statistical analysis of jumps and changing cycles. It is called the The Predictioneer's Game: Using the Logic of Brazen Self-Interest to See and Shape the Future, by Bruce De Mesquita. The main thing is to identify the true issues, not necessarily what people say they are.

Nick White avers:

The instant thing that comes to mind — perhaps my own bias — is taking risk around bonus seasons; or, more specifically, the months prior when the books are being tallied for the year. Be hard to isolate the signal from the noise, but easy to test?

I am likely to be far more cautious taking a needless big swing at something when the year has been good and I know the final reckoning is just 'round the corner.

Also — reminiscent of the Gambler's Ruin discussion in EdSpec — might one not find that particularly bad years for the market exhibit increased risk taking and greater daily ranges as those who are behind the curve swing for the fences while the edge is against them, to have one last desperate shot at the title?

On a micro level, I have found that those expecting a child or entering into a serious new life commitment (marriage, mortgage, new moonlighting venture, death of a relative) definitely change their attitudes toward risk. There may be some seasonality present in those events that could be tested vs the market?



I just read the headline about Federer using profanity — so that's why I am bringing this up. Obviously Williams was spouting a fountain of profanity, and I saw one of the Russian players using it as she was losing to Oudin. Compared to Oudin who exclaimed "OK, good, all right" when a point went her way — a positive exclamation. What is happening today with this widespread abuse?

You are what you eat, what you think and what words and thoughts are in your mind and heart. And these inside truths come out during stress, like sports. These professionals should clean up their acts. I fell into the profanity trap and had to work day by day to retrain myself to not utter this filth. It can be done. I knew I was cured when I would stub a toe or bang a thumb and the word "ouch" came out instead of "&*^%^%*&".

Profanity is anti-good. Profanity is what my father said was "lowbrow" talk. To see a grown professional women bellow the exclamation "WTF?" — it's really a shame. Am I just getting older and complaining about kids today? Am I turning into the guy who watches to make sure kids don't walk on my lawn?

Oh snap!

Nick White adds:

I would love to say that I'm immune to such things but, alas, I am not.

Coarse language is usually an attempt by males to boost the perception of their machismo amongst peers. Naturally this explains much behaviour on the trading floor and locker room alike.

However, when one works amongst our quantitative French bretheren, one will hear the far more silken, "plus tard!" at an alarming frequency during the trading day. Perhaps this is a more appropriate substitute?

Left to the reader to ponder whether it's the efficacy of their models or their nature that unleashes the vitriol from within.

Tom Marks considers the importance of courtesy:

Victor wrote: "Artie always used to thank the referees for calling foot faults because of their vigilance. Do thank the rules committee."

A FSuch sage fatherly advice also applies to courts other than those used in racquet sports.

Years ago I was out at dinner with a cousin, a seasoned litigator, and his fledgling lawyer son. The father was imparting to the young man some pointers on how he should conduct himself in a courtroom. Prominently mentioned was that, win or — especially — lose, some gesture of sincere appreciation and thanks should be made to the jury after they have reached their verdict,

The reason being is, firstly, it's the proper thing to do. In fulfilling their civic responsibilities, they have just spent their considerable time listening to the brutally boring details of a situation that almost always will have no beneficial impact on their individual lives whatsoever.

But secondly, even though he would in all probability never see any of those people again, nor be professionally reliant on their opinion, there's a good chance he would see that judge in another case.

Sportsmanship counts, it also gets noticed. The jurist community is not a very large one, and word gets around. Next time around he might get the benefit of the doubt from the bench on a seemingly minor procedural point that could eventually tip the scales in his favor.

There are few things in life with less downside than good manners. No matter the field, no matter the situation.



What is the theme of The Trees by Rush, is it Americans (oaks) vs Canadians (maples) or is it about inequality in general ? — a Reader

It is an attack on those obsessed with equality, pointing out that you can make people equal only by chopping down those who are above others.

Vincent Andres adds:

I first read that song/poem on Sardanapale, a very interesting French/English language outside-the-box thinking site.

Nick White warns:

But how do you define being "above" or — to strip away the euphemism — "better than" others? Are there not also plentiful examples whereby those whom one might consider "inferior" in one domain eventuate themselves to be superior to the original observer in another?

Such talk is dangerous. Libertarian values can all too easily be conflated with thinly-veiled elitism. Not that I am suggesting that of anyone here – just an observation from the tone of the piece.

Gordon Haave replies:

That's the point. You can't. So you chop everyone down to zero because it is the only way to make everyone equal.

J. T. Holley jokes:

Not to zero, only up to the point where all the Oaks uproot themselves and leave the Maples in their own forest and move to Colorado.

Chris Tucker concludes:

Is it not fair to say that some are better than others in a particular field of endeavor? Some are better tennis players, some are better traders, some are better friends, some have better (more) integrity, some are better at cheating. Some are definitely members of certain elites — GM Davies is an elite chessplayer, for example. The elitism that Nick refers to arises from a more broad or general sense of superiority in many ways or every way. That is the dangerous kind that leads to exclusionary thinking. The point of Neil Peart's lyrics is that we are not all equal at everything, but governments would treat us as such in order to make legislation play to the lowest common denominator, in much the same way as a teacher must teach to the slowest student in the class or the team is hamstrung by the slowest member. It is simply the distillation of one important idea, that equality can be brought about by trying to force everyone to be the same and since you definitely cannot make everyone faster or smarter or nicer or more sensible, you just might be able to make the fast ones slower, the smart ones dumber and the sensible ones senseless.



"Intelligence in War" by John Keegan is absolute solid gold. The main lesson is that history demonstrates that superior intel does not, by itself, translate to increased chances of victory — even when the intel confers a significant advantage. Rather, tactical considerations remain the decisive factor. As a parallel to the market, it's not enough to merely find an edge through analysis, it is how that edge is parlayed via execution, heeding market conditions, etc. The book is a series of case studies beginning with Nelson at the Nile, through to conflicts in WW2 and beyond. Most every paragraph yields many useful parallels and insights; Keegan also neatly summarises and applies his conclusions.



 My simple query about what baseball can teach us about markets has tapped into a beautiful reservoir of insights and consiliences. In that spirit, and I honor Larry Ritter, who challenged Collab and me to come up with 100 relations before he told us the truth about the "doctoral degree" he awarded to the former Chair, as his thesis adviser. I am going to sponsor a contest similar to the one we sponsored about whether prices tend to Lobagola. For the best little paragraphs, hopefully with some numbers that show what we can learn from baseball about markets, I will award a $500 prize. All entries will be published. The deadline will be June 15. The judges will be me, Doc, and the east coast surfer.

Nick White clarifies:

Two quick things:

1) Must we limit the baseball contest to baseball, or might we generalise to the wider lessons that elite sport in general might teach?

2) A repeat of the best, most fundamental lesson: while waiting for our GDP number to come out, I cut my position till the print. I loaded my order into the screen and hovered my mouse over the trigger for when the number hit the wires. However, I hadn't noticed that I'd accidentally right clicked while staring at the screen until 2 seconds too late…after 22 lost points an d much cursing I recalled that one is always handsomely rewarde d for checking their equipment prior to taking the field….No more trading for me today as I'll be far too tempted to chase.

Steve Ellison adds:

Rule changes, environmental changes, and new techniques can greatly affect the game, in baseball and in markets. Jeff Pearlman wrote an article for The Sporting News in April entitled "The Death of the Stolen Base". Mr. Pearlman presented some statistics about the decline in stolen bases in major league baseball over the past two decades and then looked for reasons for this decline. He singled out two major factors.

There are increasing numbers of baseball parks with retro designs, such as Camden Yards. These parks typically have smaller dimensions than the generic stadiums of the 1960s and 1970s, increasing the value of power and decreasing the value of speed both on offense and defense.

Pitchers responded to the baserunning havoc wrought by Rickey Henderson and Vince Coleman in the 1980s by developing the slide step, a technique that shortened the pitching motion and hence the jump a would-be base stealer could get.

Alston Mabry adds:

Regarding the article "the death of stolen base", does it mention that the Bill James and the sabermetrics folks have been arguing against stealing for years because of success rate doesn't justify the cost of an out. They may be having an effect on manager thinking.

Stefan Jovanovich interjects:

Saber metrics can be a bit like the joke about the 3 actuaries at the carnival shooting gallery (the 1st misses 1" to the left, the 2nd 1" to the right, the 3rd says "we won the prize"). What James' statistics don't adjust for is that the "success rate" for steals includes the runners thrown out on missed swings on hit and runs. A good base stealer (one who is safe 80% or more) is worth the risk because, with his speed at 2nd base, a run can be manufactured with one hit instead of two. Since competent pitchers average 1 hit per inning, stealing from first to second is worth the risk. So, for that matter, is stealing from second to third with less than two out. The decline in stealing is a function of the fact that base stealing takes practice, and few managers even at the high school level are willing for accept the error part of the "trial and error" process - even though it is the one skill that gives the ordinary hitting team a chance to defeat a superior pitcher. Also, at least here in the U.S., the kids with the smaller frames and quickness that you need to be a good base stealer are playing soccer and basketball. There is hope, however; Ichiro is now the model for the Japanese leagues. Somewhere in Osaka Prefecture a kid is probably studying Maury Wills video right now.



Lots of these markets looking for round numbers… eurodollar at 98.99, HSI @ 14800, AS51 at 3700, S & P at 850… fascinating!

Some great lobagolas in Australian SPI (XPM9 Index) from Friday cash close to now…dropped with dollar:yen from 13:30 local on Friday, then vaulted 80 points into the US session.

Today it's come roaring back the other way along with its Asian macro/equity brethren. The graph and data from 13:00 local on Friday to now makes for some great trade ideas vs NKM, HSI, JPY etc.



 I think one of the challenges in speculation is in deciding what data set to use, i.e  what part of the data do you include and exclude, whether it be by filtering for days that share similar characteristics, or by selecting a date range based on a known structural break. How do you decide what portion of history is relevant? And is it valid to use history to decide what portion of history is relevant? Jeff Watson's question is interesting: "what if you were paid to do the exact opposite of what history told you?" Historically, would this have been profitable? In a way, it would be a paradox if it had been. My feeling is that there may be some high-hanging fruit that exists as a premium for trading on smaller sample of data - i.e. lower statistical significance - but with correspondingly greater risk. At the limit, there is what Aaron Brown in his book The Poker Face of Wall Street called "unquantifiable risk". What is the difference between "unquantifiable risk" and mere hunch? Do unquantifiable risk situations exist? Are they truly unquantifiable? And if so, where does the edge come from?

Nick White writes:

I think the real issue is determining the best method of adaptation to new circumstances. How does one free oneself from Pavlovian responses to old market relationships? How can we have courage to believe the data when it changes?

Every speculator's current predicament is to find a path through a new and unfamiliar environment; an environment where it seems that a great deal of what we have learned about markets — from the textbooks as well as from our own experiences — are, at least for the time being, essentially worthless.

Some of the most basic market microstructure foundations — things we take for granted every day in pricing and trading — have come under attack. Even the market-wide reliance on arbitrageurs to keep things reasonably orderly required the a priori assumption that there would always be the odd dollar or two of capital around to eliminate the anomaly… so much for that.

The ever-changing cycles have well and truly thrown us a curve-ball. More than ever, current market conditions - full of unprecedented anomalies and broken relationships as they are - require fresh thinking and an unrelenting dedication to pushing through proximate causes to find the ultimate ones.

So, as it relates to choice of data, the very fact that the market is a different beast post-September to its pre-September form means we have to be more wise in our data choice and analysis. The most stable relationships, instruments and markets have undergone seismic shifts in daily ranges and changes — the correlation shifts alone have been a wonder to observe. Yes, we have a very limited data set of ~70 observations — but, in this new environment, perhaps it is more risky NOT to use that new data set? Imagine you were out sailing on a sunny day — and, all of a sudden, conditions rapidly deteriorated from blue skies to hurricanes and enormous swells — would you continue to sail as though the conditions were still blue skies and a gentle breeze? Our heuristics have to match the conditions, not the other way around.

Having made that concession, so much now seems to be driven by market-exogenous factors. In that case, perhaps the best and most reliable data set of all — studies of human behaviors under stress and uncertainty — can supplement the lack of more numerous traditional observations. In other words, it seems like a good time to apply the appropriately-filtered qualitative data alongside the quantitative.

So much of this website is dedicated to the lessons we can learn from other fields. A recurrent theme is biology and evolution; surely now is the time for the greatest flexibility in strategy and tactics so that we can be amongst the quickest to successfully adapt to the new environment.

I'm sure there would be a great range of evolutionary examples that the more biology-savvy Specs could provide for inspiration…



 Current World and 2-time Olympic champion in rowing, Drew Ginn of Australia, maintains a personal blog that's full of useful material.

Drew writes on a broad variety of topics, but all have the constant theme of how he will retain his World and Olympic titles over the next two years. Drew writes viscerally, often discussing how he deals with nerves, boredom and flatspots in training, his competitors and his performance strategies. In today's preference for the manufactured athlete, Drew's blog is refreshingly real and authentic. Drew is also no stranger to writing about his psychology and the mental processes of "intention" behind his training and racing. His observations are of much value.

The posts provide a great deal of insight into the mind of a consistent top-level performer and the take-aways for market practitioners are obvious. I highlight a few insights from his recent posts:

1. Little changes, no matter how insignificant, can add up to big performance improvements - especially if you're already at an elite level

a. "As we are now coming into a period of racing I reflected recently on one of my favourite routines. The pre-race cleaning of my oar handle is something that I actually look forward to. About 60min before race time I enjoy taking a walk down to the boat pontoon with wire brush and oar. Feeling the energy of the event is intense and to be able to take some time to absorb the buzz while doing an almost therapeutic process of clean the handle.

Next week we go into competition again and I know that there will be a number of occasions when I am standing out on the pontoon, taking it all in and enjoying one of the subtle pleasures of preparation to perform."

2. After you have done all you can to prepare, enjoy the experience of performance

a. "It's the night before we start to race our National trials…. I will keep this short, but will say this; over the last two days since arriving in Sydney we have enjoyed the final stages of preparation. It is all fine tuning now and being able to play the waiting game is critical for success.

We have focused on how we step the blades out of the water during the last few session and what's interesting is to have those moments when the light bulb goes off. It's not anything earth shattering, simple things really that seem to bring it all together. The stability and match up through the drive and the flow around the turns has improved. So tonight we are spending our time kicking back watching some television. We're pretty relaxed about the racing that's coming up; at least right now we're relaxed. I am sure in the morning there will be a few moments of those building nervous"

3. Control your controllables

a. Drew has written much about how he and his pair partner have been striving to find the right boat, the right oars, the right training regimen so that they can go ahead and focus on getting the job done with minimum distraction. The correlations here are obvious. Know your style, know what equipment complements it, have your backups and test, test, test. Leave as little to chance as possible.

b. "Some thing I will mention now about some conversation we have had about testing and it revolves around the need to find equipment that suits the athletes rowing style. Our subjective view so far and probably of the years is that different styles of rowing would suit different boats. In saying that then this testing is more about find the equipment that best suits the style of rowing that we use and plan on improving.

In brief our style that we focus on is length and rhythm. I know many coaches and athlete also have this as their aim, but we all interpret thing differently and more important is what actually happens at speed. So to ensure we are translating our intent into action we have also been gathering video footage to compare and analyse also and currently we are happy with our consistent length and as for the rhythm we are working on how to improve it further. This is really about drive and recovery ratio and the flow and acceleration. The turns become so important in creating rhythm and are for us key areas that need improving I think."

c. "Everything in our training is designed to enable us to find ways to improve and the spark gained from finding new ways to improve is energising. Our abilities, our attitudes, our motivation, our team, our families, our work, our methods, our measures, our connection, our equipment and our belief have to expand and continue to develop. These things are essential and none can be ignored."

4. Know that you have a Mistress and embrace her every now and then.

a. In reference to the Olympics - "When I think of the situation I am in training every day and preparing for the moment in the future, I do it because I love the challenge. The blistered hands, sore back, the fatigue, aching muscles, the concentration, focus, passion, fear, frustration, love, gratitude and the connection are all part of the full experience and maybe, just maybe from the outside it could at times be considered crazy. Well then that is part of it to. In fact it's probably a great indicator that I am heading in the right direction because so many don't seem to want to step from within the crowd. To make a difference, to be better, to stand out does require resilience and persistence. The funny thing is at a very early age we all have these qualities. What changes as we grow from the 2-3 year old child into adulthood?"

5. Nerves are good, and no matter how good you get, you'll always have them.

a. I highly recommend the whole post.

These are just a few quick observations. Time spent reading Drew's blog will provide a wealth of material for improvement in markets and life. It's not every day you can learn directly from an Olympic Champion. 



 I thought some might be interested in the following title: "Speed Mathematics - Secret Skills for Quick Calculation," by Bill Handley (published by Wiley, interestingly enough). Although completely discovered by accident, this book may actually have changed my life, and has taught me a valuable lesson about perceptions in life and the markets. I'd like to share it, if I may.

Aside from the useful techniques in the book, the most valuable lesson learned is an indirect one: The most hopeless seeming situations may carry the gravitas they do largely because a specific problem owns a person, rather than the person owning their problem. This limitation may then be continually reinforced -usually by a combination of self and external influences (teachers, friends/family, culture, market etc). The key to victory over this persistent problem seems to lie in finding a solution that is non-standard for one's particular predicament. Sometimes you can search far and wide - and apply! - a standard solution with no joy. But that doesn't mean the answer isn't out there. Indeed, the biggest problem in one's life may be overcome by some very simple solution that is heretofore hidden/overlooked.

The techniques I discovered in this book are not new, but I have had twenty years of discouragement and resignation over some of my math skills. I believed I simply wasn't "quantitative." However, at any time I might have stumbled across this technique and many things may have been different. As persistent and pervasive as the problem was, so was the solution. Within 30 minutes of learning the new technique, the problem that had haunted me for so long was solved. Most important, the problem wasn't with an intellectual limitation I thought and believed I possessed. Rather, the problem was the techniques I was applying to overcome that "perceived" limitation. Within a day, I actually saw a new and exciting path for my life - all because of being shown a way of "owning" and changing my "limitation." My brain was the same, but my methods had changed.

I think some of the biggest limitations to overcoming problems are rooted in pride. It's a tough thing to seek help in a way that damages your self-perception (such as consulting a basic math book to overcome problems with basic computation). But what a small price to pay! How many of the problems that we face - the ones that threaten to overwhelm us - could be easily solved by a yet unconsidered solution or a person we've not yet met? What would be different in your life if the biggest limitation you had were removed? I can tell you from first-hand experience, it is a most exhilarating feeling.

Sometimes a problem may truly be beyond our powers to change. We're all frail, with diverse randomness/future-coping mechanisms. We must be vigilant of our true weaknesses, but we must be equally vigilant of those "false" weaknesses that we have accepted as part of the fabric of our reality. For all that, discoveries such as the one I made may give some hope that the tide may yet turn favorably. Some may just have lost hope in the possibility that a solution could be closer than they think - and may even be hidden by their own hubris.

There are numerous other insights that arise from this foundational idea, but those can be left to the meta.

Craig Mee adds:

Yesterday somebody mentioned to me about buying a birthday gift. They couldn't quite find the right object they had in their mind. This person commented, "I've just got to let this go, and get the idea right out of my mind or I'll never move on."

Maybe in markets at times this could be a good idea. Sometimes it seems that we spend too much time analyzing the outcome without spending enough time on the suitability of the initial conception.



 Ned Humbert would like to make you aware of a fascinating challenge. Who's right? Dow or Fama?

Pick which graph comes from a random number generator and which one is a real stock price path. It is almost as fun as the real thing, like Rorschach ink blots for traders! The running stats are quite interesting, too, despite the obvious flaws in this kind of thing.


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