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Even The Smartest…….

I can bet you every teenager since the age of the invention of the mass produced car has through that they invented having sex in the back of a car. This is simply the way our cultural memory works – we are disconnected in many ways from the knowledge and experience of those who have gone before. Therefore we think that we are discovering something for the first time. What prompted this odd line of thinking was that I saw a line chart of Bitcoin and I thought I have seen something like this before. I have reproduced a chart of Bitcoin below.


And I was right – I had seen something like this before….from 300 years earlier.


The above chart is of the share price of the South Sea Company during what has become known as the South Sea Bubble (SSB), one of the original examples of investor mania. Think of it as the Bitcoin of 1720. The chart has several discontinuities that I have removed to smooth the data because the data flow in 1719 was not the same as it is today with changes in price often only occurring once per week. And for interest sake I have laid a 15 period moving average over price. What makes the SSB so compelling is the names of those who were caught up in it. The individual most often cited is Sir Issac Newton who could rightly be described as one of the three smartest humans to have ever lived. It is thought that Newton lost anywhere between £ 10,000 and £20,000 as a result of speculative foray into the SSB. However, much of the talk of Newtons financial folly is incorrect, it is true that he made a fortune in the early period of the boom but like most investors in speculative frenzies failed to withdraw when it became apparent that the boom was over. But Newton had a diversified approach to investing and had risk spread over a variety of instruments which accounts for the fact that he was able to absorb his losses and still have an estate valued at £30,000 when he died.

The figures quoted above are difficult to put into context because we immediately assume the £30,000 loss back then is equivalent to a bit more than £30,000 loss now. It is difficult to map the changes in the buying power of currencies over time. Using simple converters doesn’t actually present a true picture since it is not as simple as saying £X was worth 1 300 years ago therefore it is now worth £X times 10. What is more appropriate measure is to look at the value versus the cost of an physical object – this is actually fairly easy and gives some measure of the size of his fortune. Some 45 years after the SSB, Nelsons flagship HMS Victory was launched at a cost of £63, 176 – so Newton fortune was roughly worth half the cost of a state of the art warship built 45 years later. In today’s terms this would value his estate in the hundreds of millions, which seems about right as a ball park guess. What is most interesting in the SSB is the role of Thomas Guy – the founder of Guys Hospital in London. Guy was ostensibly a bookseller but reality was a shrewd stock speculator who at the time of his death left the staggering sum of  £219,499 to found the hospital that still bears his name.

The issue here is that speculation is nothing new – nor is the expression sucked in and Bitcoin for all its rationalisations is merely another bubble. One of the joys of advancing age is that you have seen it all before. I distinctly remembered being told during that dot com boom that in the future everyone would buy their pets online. Apparently no one thought through the mechanics of stuffing a hamster in a post pack….turns out it doesn’t work so well. Speculation at its heart is an emotional journey that often takes us to places and introduces us to versions of ourselves that we both dont often see and dont want to see. This is what caught Newton – his emotions overrode his powerful intellect and in the end he was little more than a mug punter caught up in the maelstrom of both events and his own emotion weakness.




New Traders


A Lazy Person’s Guide to Happiness

Happiness is an active process, not something you get by sitting back and waiting. It’s something to be grabbed by the horns or more vulnerable areas and then conquered. At least, this is the gist of the message from Tony Robbins and gurus of his ilk.

Many also say happiness is not something we can buy, or steal, or work too hard to acquire. If you work too hard at it, you end up obsessing over your own state of mind—Am I happy? … Really though? And like love, if you have to ask, the answer is no.

So what’s the right way to think about effort and happiness? Should I be trying for “happiness” per se—or something more magnanimous, like purpose or meaning?

Or money? Is happiness actually all about money? That would be a real twist.

More here – The Atlantic

Outrage In Paradise


Why Its Good To Be Wrong

That human beings can be mistaken in anything they think or do is a proposition known as fallibilism. Stated abstractly like that, it is seldom contradicted. Yet few people have ever seriously believed it, either.

That our senses often fail us is a truism; and our self-critical culture has long ago made us familiar with the fact that we can make mistakes of reasoning too. But the type of fallibility that I want to discuss here would be all-pervasive even if our senses were as sharp as the Hubble Telescope and our minds were as logical as a computer. It arises from the way in which our ideas about reality connect with reality itself—how, in other words, we can create knowledge, and how we can fail to.

The trouble is that error is a subject where issues such as logical paradox, self-reference, and the inherent limits of reason rear their ugly heads in practical situations, and bite.

Paradoxes seem to appear when one considers the implications of one’s own fallibility: A fallibilist cannot claim to be infallible even about fallibilism itself. And so, one is forced to doubt that fallibilism is universally true. Which is the same as wondering whether one might be somehow infallible—at least about some things. For instance, can it be true that absolutely anything that you think is true, no matter how certain you are, might be false?

What? How might we be mistaken that two plus two is four? Or about other matters of pure logic? That stubbing one’s toe hurts? That there is a force of gravity pulling us to earth? Or that, as the philosopher René Descartes argued, “I think, therefore I am”?

More here – Nautilus

It Does Not Mean What You Think It Means

The interview in the post below with Daniel Kahneman got me going back over some old links that looked at the application of his and Amos Tversky’s ideas to trading and the chestnut I keep coming up against is the following question.

You have been given a choice between either –

a. $100 guaranteed, or

b. A 50/50 chance to receive either $200 or nothing.

The point is made that people will invariably opt for the first choice despite the fact that the mathematical expectancy of the two choices is the same (I have something to say about this in a minute) This is used to illustrate the point that traders invariably engage in the self defeating action of cutting their profits short. My rationale as to why we do this is probably buried somewhere deep in the evolution of our psychology, which in turn is linked to our desire to maximise our own pleasure. Consider this, you are one of our ancestors and you come across a fresh kill on the tundra. A bounty like this is rare because life is harsh, short and brutish. Naturally you grab whatever you can and run away, after all the kill belongs to something else and you don’t want to be around when it gets back. You are rewarded handsomely for this behaviour by avoiding starvation long enough to breed, thereby passing on this behaviour. My guess is that those ancestors of ours who stuck around to be pigs generally didn’t live long enough to have offspring. Over millennia this behaviour finds a modern translation in that you can never go broke taking a profit and it becomes the bane of all traders.

The reverse of this problem is offered as an example of how poor we are at dealing with losses. The problem is generally framed as you have been given a choice between either –

a. a guaranteed loss of $100.

b. A 50/50 chance to lose either $200 or nothing.

Traditionally, traders opt for the latter – so we have the perfect storm of cutting profits short but letting losses run. This is the reverse of the often quoted maxim for successful trading.

However, this example has always troubled me. I understand the point it is trying to make and I think that point is valid and true, the majority of people do what Jessie Livermore describes as doing exactly the wrong thing – selling the thing which gives you a profit and keeping the thing that makes you a loss. My discomfort with this example is that it offers a coin toss and not a continuum. Trading is not a coin toss it is a continuum and our trades reflect it, so whilst the lesson for traders is valid the example used to get there is weak. The question would be better phrased and more reflective of trading if it were presented as over time you have a 50/50 chance of receiving $200 – this reflects the actuality of expectancy.

There is another point of difficulty I have with the problem and it is one of both scale and economic utility. Let me rephrase the initial question as –

You have been given a choice between either –

a. $1B guaranteed, or

b. A 50/50 chance to receive either $2B or nothing.

The psychological import of the question changes as the scale changes – this is always a problem I have had with psychology as opposed to physics. The answer should remain the same irrespective of the scale of the problem. But in the real world you would be insane to risk a guaranteed $1B on a coin toss . The decision to not risk it would not be reflective of being a poor trading but upon understanding that there was nothing you could buy with $2B that you could not buy with $1B. The decision reflects one of economic utility as much it does the psychology of those making the decision. Interestingly, there is a modern example of investors walking away from such a guaranteed payoff.  In 2010 Google offered to buy Groupon for an estimated $6B , it was rumoured that this offer came on the back of Yahoo offering $3B a month earlier. Groupon knocked back both offers – needless to say the company is valued nowhere near that now.

Trading is a complex psychological endevour and whilst some simple models do make strong points we need to be aware that the models have limitations and that trading is a fluid game that at times demands that you act in ways that a psychologist might not approve of.




Why We Contradict Ourselves and Confound Each Other


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