Billion Dollar Trading Losses: Is Biology to Blame?

Discussion in 'Wall St. News' started by OnClose, Jul 20, 2012.

  1. OnClose


  2. I would say that biology has something to do with the fact that he looks like a talking billiard ball
  3. What else could be to blame? We're biological creatures, after all. Unless you want to posit some supernatural or metaphysical cause. Which is fine, but you then are outside the realm of scientific proof and into the realm of faith and philosophy.

    I actually get very anxious during winning streaks because I get the feeling that I'll pay for it with a losing streak sometime soon.
  4. Lol.... ???

    How about there is no reason to risk $1b on any 1 bet, unless you have $100b? I don't think it's a biological problem. It's an ignorance problem....
  5. 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.
  6. 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!
  7. bone

    bone ET Sponsor

    I believe that John Coates, the academic promoting this view, has a very legitimate point for a certain type of trader, namely, a proprietary firm or bank desk or HF trader. This is a different animal that your portfolio manager type ( which would be more correlated to the Warren Buffett observation in my view ).

    Mr. Coates is indeed correct about "the whale", Brian Hunter from Amaranth, and those types.

    I do not believe that any of this is relevant to sociopathic thievery ( Bernie Madoff, Nick Leeson, Refco, Corzine MF, etc. ).
  8. There's actually some evidence that Buffett uses a variant of the Kelly Criterion for his position-sizing (see the wikipedia article on Kelly for a citation), so, given his track record, I'm sure that he puts much more than a small percentage of his capital at-risk.

    Point being, you don't know what's "disproportional" unless you have detailed data on historical performance. For all you know, the guy's track record justified an even bigger bet. Ironically, while attempting to claim the trader profiled in the article was ignorant, you have shown just how ignorant you are of position-sizing methods.

    You talk about learning as if the ability to learn isn't biological. As is the ability to ignore lessons that others, with different biology, could learn more easily. Or that different hormonal states lead one to take more or less risk. We've only begun to scratch the surface on the causation, but as tools for monitoring traders' brains and chemistry, I have no doubt that those will become part of the risk management schemes on trading desks.

    So, yes, everything in trading is biological.
  9. I thought that you were supposed to lose money on a hedge?? Am I missing something here or is everyone just creating drama over the notional not the actual intent of the trade??
  10. yes, a hedge assumes you have a profit to protect, and you are willing to give up the hope of top dollar to lock in a floor.

    Occasionaly hedges go wrong, and you lose on both sides or you lose way too much on one side.

    otherwise, if your body chemistry changes significantly throughout the course of a trade, you are just simply trading too large, or you have not come to grips and accepted and are comfortable with the risk of "worse case scenario."

    I like to think I am confident, but not overly confident, and I have no fear, because I always know what I am going to do based on what happens.

    It's not uncommon to be a little happy when things go unexpectedly good (and that is just a function of time, for instance, you made more in an hour than you expected to make in a week), or to be a little depressed when things go bad which is also a function of time (you lost more in a day than you use to make when you had a job in a month.)

    It is a lot easier for me now that I am old to remain calm, because all I search for is a decent return.

    When I waa young and had a family to support, every $50 was an electric bill, every $500 was a mortgage payment, and every $100 was groceries, and to see that pass before you sometimes in a matter of minutes on your screen could be quite stressful.

    I think what the man is talking about is a feeling of invinceability.

    After a while, you learn that the chop always follows the trend, good times follow bad times.

    Like the man said, "Turn Turn Turn To everything there is a season"

    So you really only have one choice, do you want to bet that things will keep going the way they always have, or do you want to bet things will change.

    It really isn't that simple, since if things keep going the way they always have, that means things are always changing.

    And this is what happens to me when I hit a new account high and get flat on Thursday going into the weekend flat. A strange peace and delusions of wisdom overcome me.

    The whole thing is kind of biological, I even get my appetite back.
    #10     Jul 20, 2012