Last week Zerohedge reported that Nassim Nicholas Taleb’s hedge fund Universa Investments LP made a $US1 billion gain from last week’s Black Monday.
Taleb’s success has several potential lessons given his Incerto philosophy:
- Find a contrarian yet possible / plausible future that has optionality and positive expectancy – such as a significant stockmarket correction or VIX change (vega or volatility arbitrage).
- Map out the possible / plausible future as an event chain or Bayesian belief network / graph where there is a rapid change in the rate of change (the gamma or second derivative of the delta in options pricing) — such as a Wyckoff mark-down / deleveraging / flash crash event.
- Use game-theoretic reasoning to foresee how others in the event chain or Bayesian belief network / graph will act.
- Use ‘out of the money’ optionality to make small losses during regular conditions with outsized gains when your event chain or Bayesian belief network / graph occurs – and the ‘out of the money’ optionality becomes ‘in the money’.
I’ve started a TinyLetter account about “Resilience strategies for living in an antifragile world.”
Metis Alpha will feature excerpts from my reflective trading diary; on-going PhD work; a reassessment of Masters work in futures studies and strategic foresight; and things I find during personal therapeutic work using cognitive behavioural therapy. The title refers to Nassim Nicholas Taleb’s book Antifragile: Things That Gain From Disorder (New York: The Penguin Press, 2012).
The first entry is on the Kovner Effect.
1. Some interesting new research on achieving happiness: “Over the past decade, an abundance of psychology research has shown that experiences bring people more happiness than do possessions.”
2. David Thomson’s insights on the film Whiplash: “Genius is actually beyond teaching or example. It doesn’t bother with or heed advice to practice 25 hours a day or suggestions to give up on sex, golf, and other addictions.”
3. Norway’s climate change trade with Liberia echoes the Coase theorem on negotiation: “In 1960, the economist Ronald Coase argued that bargaining between parties could, under certain conditions, produce a mutually beneficial and efficient solution to problems like pollution.”
4. A bug in video poker made two allies rich; personal enmity and tax problems followed: “Every jackpot, he realized, was being reported to the IRS, and he’d already won enough from the bug to propel him into a higher tax bracket.”
5. Fail-Safe‘s insights about Cold War nuclear strategy: “But the crisis’s real cause is the logic of the nuclear system at every level—its institutions, structures, procedures, and rationales. This isn’t a movie about why we should fear machines or the people who control them. It’s about how managerial systems can bring about just the things they’re designed to avert.”
6. How to live an anti-fragile way of life: “The general underlying principle here is to play the long game, keep your options open and avoid total failure while trying lots of different things and maintaining an open mind.”