Registered: Dec 2009
07-20-12 02:05 PM
Quote from logic_man:
Look at Buffett's investments and tell me that he doesn't put more than $1 billion at-risk quite frequently. Is he ignorant?
I think the broader point remains. The more we find out about our biological systems, the closer we will find that certain biological "types" obtain certain trading outcomes more than other biological "types". In an institutional setting, we could find ourselves in a situation where traders come in in the morning, take a saliva swab and have it analyzed and are allocated capital for the day based on the analysis. You could even do the same thing multiple times per day as the trader either underperformed or outperformed. Given the evidence that is coming out about biology and trading performance, if I were a risk manager in a trading firm, I'd consider putting this in place as a risk management tactic.
You ignored the point I was trying to make, which is betting disproportionately to your risk capital. Buffett has net worth of $44B so risking $1B at a time isn't that big a deal, especially since he is a long term player, and probably doesn't put that $1B all in the same investment.
So I guess traders become successful because of biological changes? I think it makes more sense to say that they learned how to trade, or fixed their ignorance.
From what I have seen and read about trading and risk exposure, people become winners once they have learned what they are doing. It is ignorance of risk that causes most investors/risk takers to lose (Average Joe wagering $1B on 1 bet)!
The biological explanations he gives could partially explain why winners develop a risk tolerance over time. But, he is completely ignoring the fact that this is learned behavior.
"Every blowup I've seen on Wall Street or in London with losses north of a billion dollars have occurred at the hands of a trader who is at the end of a multi-year winning streak," he adds. "Traders on a winning streak — those you should be worried about."
These traders thought they could progressively bet bigger (due to previous winning streaks), not because something changed biologically. Just because you win for a while doesn't mean that eventually you won't lose. Therefore, the ignorance of risk problem!