Showing posts with label Nassim Nicholas Taleb. Show all posts
Showing posts with label Nassim Nicholas Taleb. Show all posts

Sunday, March 19, 2023

The Probabilistic Mindset of Successful Traders | Mark Douglas

How can someone produce consistent results from an event that has an uncertain probabilistic outcome? To answer this question, all we have to do is look to the gambling industry. Casinos make consistent profits day after day and year after year, facilitating an event that has a purely random outcome. Shouldn't a consistent, nonrandom outcome produce consistent results, and a random outcome produce random, inconsistent results? 
 
"I just wait until there is money lying in the corner,
and all I have to do is go over there and pick it up.
I do nothing in the meantime.
"
Jim Rogers

What casino owners, experienced gamblers, and the best traders understand that the typical trader finds difficult to grasp is: events that have probable outcomes can produce consistent results, if you can get the odds in your favor and there is a large enough sample size. The best traders treat trading like a numbers game, similar to the way in which casinos and professional gamblers approach gambling. It's the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes the casino and the professional gambler effective and successful at what they do. 
 
 
Their belief prevents them from engaging in the pointless endeavor of trying to predict each individual outcome. They have learned and completely accepted the fact that they don't know what's going to happen next. More important, they don't need to know in order to make money consistently. Because they don't have to know what's going to happen next, they don't place any special significance, emotional or otherwise, on each individual hand, spin of the wheel, or roll of the dice. In other words, they're not encumbered by unrealistic expectations about what is going to happen, nor are their egos involved in a way that makes them have to be right. As a result, it's easier to stay focused on keeping the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making costly mistakes.

A probabilistic mindset pertaining to trading consists of five fundamental truths:
  1. Anything can happen.  
  2. You don't need to know what is going to happen next in order to make money.  
  3. There is a random distribution between wins and losses for any given set of variables that define an edge.  
  4. An edge is nothing more than an indication of a higher probability of one thing happening over another.  
  5. Every moment in the market is unique.
 
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Sunday, July 31, 2022

On Randomness, Uncertainty, and Probability | Nassim Nicholas Taleb

Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance. When things go our way we reject the lack of certainty. The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions. Although Soros did not deliver anything meaningful in his writings, he knew how to handle randomness. My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it. 
 


A mistake is not something to be determined after the fact, but in light of the information available until that point. No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word.Mild success can be explainable by skills and labor. Wild success is attributable to variance. Bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no experience in handling risk. Alas, investors and businesses are not paid in probabilities; they are paid in dollars. Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration.

We do not need to be rational and scientific when it comes to the details of our daily life—only in those that can harm us and threaten our survival. Modern life seems to invite us to do the exact opposite; become extremely realistic and intellectual when it comes to such matters as religion and personal behavior, yet as irrational as possible when it comes to matters ruled by randomness (say, portfolio or real estate investments). I have encountered colleagues, "rational," no-nonsense people, who do not understand why I cherish the poetry of Baudelaire and Saint-John Perse or obscure (and often impenetrable) writers like Elias Canetti, J. L. Borges, or Walter Benjamin. Yet they get sucked into listening to the "analyses" of a television "guru," or into buying the stock of a company they know absolutely nothing about, based on tips by neighbors who drive expensive cars."