Archives of “The Black Swan” tag

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Taleb reveals unsettling truths

  
Analysis, Education
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How fragile we are. Five years on from the Lehman Brothers collapse, political and regulatory errors have made the world’s financial system even more fragile.

This alarming line of thought comes from Nassim Nicholas Taleb, best known for The Black Swan, which explained markets’ difficulties in pricing extreme events for which they had no precedent.

 Mr Taleb, who spoke to me in London last week, divides opinion. For some he is a genius, for others a charlatan. What seems clear, however, is that his gloriously charismatic act and polymath choice of imagery, drawn from philosophy, mathematics and the Classics, can get in the way of underlying ideas which are not in fact far-fetched. Indeed they contain a hard kernel of commonsense truth.

Here, then, is an attempt to render Mr Taleb’s poetic arguments in prose.  (more…)

NASSIM NICHOLAS TALEB AND THE BED OF PROCRUSTES- Quotes

  
  Education
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Nassim Nicholas Taleb, the former trader and well known author of The Black Swan and Fooled By Randomness, has put together a new book of aphorisms, entitled The Bed of Procrustes.  The Procrustes of Greek mythology was a cruel fellow who stretched or shortened people to make them fit his inflexible bed. Mr. Taleb’s new book addresses the modern day ways in which “we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas, reductive categories, specific vocabularies, and prepackaged narratives, which, on the occasion, has explosive consequences.”  In other words, we live under self-imposed delusions.  Here are a few of the aphorisms that expose our delusionary thinking, many of which can be applied to trading.  But, in order to understand their application, we must first step out of our delusional state.

The stock market, in brief: participants are calmly waiting in line to be slaughtered while thinking it is for a Broadway show.
You are rich if and only if money you refuse tastes better than money you accept.
The best test of whether someone is extremely stupid (or extremely wise) is whether financial and political news makes sense to him.
You can be certain that the head of a corporation has a lot to worry about when he announces publicly that “there is nothing to worry about.”
The main difference between government bailouts and smoking is that in some rare cases the statement “this is my last cigarette” holds true. (more…)

Anti-Fragile Trader

  
  Education
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The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.

The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.

The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable. (more…)

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