Fascinating article by Michael Lewis of Liar's poker fame pointed out by fellow blogger
Contrary Canary. As far as the efficient market/random walk theory, it's important to remember that randomness is in the eye of the beholder, a point Taleb makes repeatedly in his books. If I recall correctly, Taleb gives the example of a pregnant woman. From a stranger's point of view, her baby being a boy or a girl is a random event with probabilities 1/2 and 1/2 for the 2 possible outcomes. From her point of view, thanks to doppler technology, the sex of her child is not random anymore, she knows for certain that her baby will be a boy or a girl.
Apply this to investing/trading: to a hypothetical master trader, the fact that he or she is in the top 1% of traders is not a random event, because he/she (presumably) knows what he/she's doing. From the hapless scholar's (let's call him Mr. Fama) point of view, that particular trader is just lucky, he or she just happens to be part of the surviving 1% of the initial sample of traders. So as far as Mr. Fama is concerned, whether a particular trader beats the market or not is a random event and has nothing to do with that trader's abilities. Should Mr. Fama sit down with the trader, understand the trader's methodology and test that methodology (provided Mr. Fama has the intellectual curiosity, flexibility and capability to do so and provided the trading methodology is conducive to modelling) against a throw-the-darts methodology, he would discover that the trader's performance is indeed superior and that has nothing to do (or at least not much to do) with luck or survivorship.
I mean, just think about it for a second, has anyone anywhere ever accused Michael Jordan of being "just lucky" or theorized that the only reason he was such a great basketball player is that out of a starting sample of say 10 million basketball players, he was the only one lucky enough to survive all the tests, obstacles and competitions he faced? Obviously, luck had a hand in his success but how important was it compared to his talent, his work ethic and his competitiveness?
Contrary Canary. As far as the efficient market/random walk theory, it's important to remember that randomness is in the eye of the beholder, a point Taleb makes repeatedly in his books. If I recall correctly, Taleb gives the example of a pregnant woman. From a stranger's point of view, her baby being a boy or a girl is a random event with probabilities 1/2 and 1/2 for the 2 possible outcomes. From her point of view, thanks to doppler technology, the sex of her child is not random anymore, she knows for certain that her baby will be a boy or a girl.
Apply this to investing/trading: to a hypothetical master trader, the fact that he or she is in the top 1% of traders is not a random event, because he/she (presumably) knows what he/she's doing. From the hapless scholar's (let's call him Mr. Fama) point of view, that particular trader is just lucky, he or she just happens to be part of the surviving 1% of the initial sample of traders. So as far as Mr. Fama is concerned, whether a particular trader beats the market or not is a random event and has nothing to do with that trader's abilities. Should Mr. Fama sit down with the trader, understand the trader's methodology and test that methodology (provided Mr. Fama has the intellectual curiosity, flexibility and capability to do so and provided the trading methodology is conducive to modelling) against a throw-the-darts methodology, he would discover that the trader's performance is indeed superior and that has nothing to do (or at least not much to do) with luck or survivorship.
I mean, just think about it for a second, has anyone anywhere ever accused Michael Jordan of being "just lucky" or theorized that the only reason he was such a great basketball player is that out of a starting sample of say 10 million basketball players, he was the only one lucky enough to survive all the tests, obstacles and competitions he faced? Obviously, luck had a hand in his success but how important was it compared to his talent, his work ethic and his competitiveness?
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