Victor Niederhoffer and Nassim Nicholas Taleb: A Quick Comparison

Discussion in 'Psychology' started by Frederick Foresight, Jun 23, 2015.

  1. It has been a number of years since I read two books by each of these authors and traders. And it was only a few days ago that I reread Malcolm Gladwell's excellent 2002 article about these two men:

    http://gladwell.com/blowing-up/

    http://docs.comparacaodefundos.com/blowingup.pdf

    Something occurred to me that I did not fully consider when I first read the article several years ago. Let us very briefly consider each of the trader's backgrounds and then go forward.

    Both men are highly intelligent, very well educated and accomplished. Mr. Niederhoffer had a history of considerable success in whatever he set his mind to. He approached the markets, tested whatever could be tested (his credo), and then confidently embraced the risk that he believed he had surmounted with the rigor of his testing. Mr. Taleb came from a family of influence and means that lost both in a matter of months when his homeland blew up. He also became improbably ill, but was fortunate enough to conquer his illness. It is easy to see why Mr. Taleb held a different view of risk and the unexpected.

    So while one man confidently embraced risk, arguably to a fault by the events that followed, the other wanted almost no part of it, by virtue of the manner in which he traded. Both had extreme views at the opposite ends of the risk continuum. Both arrogantly believed that their way was not only right for them, but the "right" way of approaching the markets, period. Both are the product of their history, as are we all.

    I'm reminded of Ayn Rand and her magnum opus, Atlas Shrugged. It said much about Rand. She escaped from a repressive communist regime and only saw the opposite extreme as sanctuary. For her, as for Niederhoffer and Taleb, there could be no middle ground. Each of them was marked by a past that led them to an extreme view of the world they lived in.

    I don't know how Mr. Taleb's trading is presently going. However, my understanding is that Empirica Capital, for whatever reason, has closed its doors some years ago. As for Mr. Niederhoffer, he is said to have mentored several of the hedge fund community's luminaries. This is a notable accomplishment on its own. However, it is telling that his protégés have evidently chosen a different path, judging by what is know of their risk profiles.

    I am merely a mouse talking about elephants, and so I wish not to judge them so much as learn from them, in the most general of terms. What I think I learned is that while both men held arguably extreme views towards risk, the answer almost certainly lies somewhere between the extremes, as it does for most things in life.
     
    Last edited: Jun 23, 2015
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  2. trilogic

    trilogic

    Well said, its all about luck and timing, the manner you employ risk is unlimited, lets say you employ a great strategy and earns 8% with a nice cure risk adjusted, yet "the street" will have you down as a poor or marginal "trader" because for two years in a row "xx" traders earned 12% with a "similar curve", fast forward that "similar curve blows them all out and they lost 8 percent year over year just nobody knows its possible today, point is its all BS, markets are dynamic The best scenario is you get lucky enough to manage some large dollars and have some great years and make some FU money and leave the BS behind, get into something else and don't spend a lot of money.
     
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  3. Insightful post, Fred. I have spoken at length with Taleb--- i respect him. Remember, Niederhoffer came from lower middle class family-- he was not born with a silver spoon--making his accomplishments even more remarkable. surf
     
  4. It is because VN came from humble beginnings and elevated himself so markedly that he perhaps considered himself impervious to risk. He had full confidence in his ability to conquer whatever problem he was faced with, based on his many past accomplishments, and he tested whatever could be tested. He did what he could do and that had always been more than enough in the past. But I think history has shown that you cannot define or corral uncertainty with the kind of accuracy and confidence that VN seemed to believe. Evidently, uncertainty requires a wider berth.
     
  5. I don't disagree
     
  6. Of course, there could be deeper issues involved that govern both men's outlook and behavior, but I'm hardly qualified to scratch the surface as it is.
     
    Last edited: Jun 23, 2015
  7. Obviously.

    VN built a team of strong risk managers for his last foray into OPM. The issue still occured. Thats as much as i can say, observers can draw their own conclusions.

    surf
     
  8. If the issue still occurred, then the risk managers evidently did not manage to rein in VN's, shall we say, robust appetite for risk. And so, my question is, What purpose did they serve? Serious question.
     
    Last edited: Jun 23, 2015
  9. samuel11

    samuel11

    I would guess they did not capture the difference between probabilities and associated payoffs?

    The new book from Taleb “Silent risk” explains this quite well at the beginning.
     
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  10. I didn't know he wrote a new book. Thanks for the heads up.

    Regarding your response, I can't comment with any confidence on what the team of risk managers did or didn't do. But I can make a guess based on a couple of assumptions. First, I think we can safely assume that these guys are smart. VN may or may not have chosen them because they are like-minded. That is not necessarily as clear. And maybe the strength of his personality may have overpowered them. That's not clear either. But, perhaps, like VN himself, they might have been taken in by their own intelligence. Perhaps they accounted for risk with too much exactitude and then relied too much on that exactitude.

    And as I suggested earlier, I think uncertainty requires a wider berth than probability. And since I think the markets are better characterized by uncertainty than probability, they may have played chicken with the markets a little too close to the line. Perhaps because my background in statistics is relatively weak (only intermediate level during my MBA three decades ago), I favor the notion of so-called "shotgun probability," or "balance of probability" when it comes to assessing the market, as opposed to the much more nuanced marksman-type probability with little room for error. It's convenient for me to think it can't be done with precision because I, myself, can't do it. :)

    As an aside, by wider berth I don't mean to imply the need for a wide stop loss, at least not in my case. Quite the contrary.
     
    Last edited: Jun 23, 2015
    #10     Jun 23, 2015