Hey bozo, read carefully. Why are you asking questions if you aren't going to read carefully the answers? You are talking to Ralph Vince himself you bozo.
I guessed that's him too, but I don't make assumption about anyone's identity just based on their screen name.
Wasn't it ralph vince himself who said, " "In a negative expectation game, there is no money-management scheme that will make you a winner?" I've often used that quote myself as a reference on this board. Did you change your thinking, or are you simply infering that the finite number of trades... scenario, is positive expectation, in which case it is not a losing strategy. P.S. Loved your books. Assuming it is you. P.S.2. Get ready to waste a lot of energy defending your ideas here.
No, I am the bozo. I can make mistakes that exceed most people's nightmares, quite reflexively. I AM trying to promote the LSP Model (the degree of success or failure here, I cannot determine -- I have decided it will likely take a generation to catch on, given exactly what you refer to about what people are taught in university). I HAVE encountered some who DO implement LSP, but usually in such bastardized forms that I don't even really recognise it. Usually, they start out by telling me something along the lines of,"Here, let's show you what we are doing for our allocations...." I can tell you that most of the larger institutions I have been privvy to the inner workings of use allocation schemes that make the individual trader's techniques out there appear extremely sophisticated! This is the very reason this post, referred to me this morning, so caught my interest. -Ralph Vince
[["In a negative expectation game, there is no money-management scheme that will make you a winner?" I've often used that quote myself as a reference on this board.]] Yes -- I said that. I believed that. For a long time. I was dead wrong. It is only true in the long run sense. In the finite sense (and all of our trading is finite in duration) it is NOT true. (See why I am the bozo? But life.....is about adaptation.) [[Did you change your thinking, or are you simply infering that the finite number of trades... scenario, is positive expectation, in which case it is not a losing strategy.]] I am expressly saying that a finite, losing stream CAN be made into a winner through money management. Further, it seems simians -- which bozos like me qualify for -- are innately endowed with the ability to do exactly THAT. This is why we have survived. [[P.S. Loved your books. Assuming it is you.]] It is me. 'll prove it too. Tomorrow, I will write a blog about why bailout works. It is accesable from my web page : http://parametricplanet.com/rvince/ [[P.S.2. Get ready to waste a lot of energy defending your ideas here.]] YOU have to be easy on me. I am an old man, and my blackberry requires I type with my now-largest appendages of my thumbs.
Yours are some of the few trading books that actually do not collect dust on my shelves (and there are quite a few). I refer to it often, and am pleased you were able to bring kelly criterion and expectation concepts to the masses in comprehensible form. No need to depreciate yourself...(remind me a bit of another bright individual I've corresponded with by the pseudo name of gummy), you've earned the respect of many I'm sure. I've often wondered about different interpretations of optimal f as well. But I'll let you inform here. Cheers, dt 98
One of the main motivation for me to initiate this question is that, the concept of Kelly Criterion, Optimal f, geometric growth...etc, all seem very mathematically brilliant to me. Yet they don't seem to be the mainstream in the professional money management business. I am curious to hear any thought from anyone working in the industry as to what they think of the Kelly Criterion and Optimal f framework.
FWIW, here is an excerpt from a paper regarding poundstone's excellent layman's book; "Thorp is not the only money manager to have used the Kelly criterion successfully. According to Poundstone, Kenneth Griffinâs Citadel Investment Group, James Simonsâs Medallion Fund, and D.E. Shaw and Co. have done so too. Baltimoreâs legendary William Miller, manager of the Legg Mason Value Trust, is another convert, having written in his 2003 annual report that âThe Kelly criterion is integral to the way we manage money.â This is significant because Millerâs fund is the only SEC-regulated mutual fundâThorpâs various funds and the others mentioned above being unregulated hedge fundsâever to outperform the S&P 500 for 10 consecutive calendar years. Indeed, it has currently done so for 13 consecutive years and seems to be on track for a 14th. Yet Miller suggested to Poundstone that fewer than a tenth of working portfolio managers have ever heard of the Kelly criterion, whichâunlike the standard tools of portfolio managementâdid not arise from the work of Nobel prize-winning economists. Poundstone is unmistakably eager to publicize the fact that the mainstream approach to portfolio management has a credible rival, about which investors are rarely told. He attributes the apparent suppression of this information to the towering prestige of the Nobel prize-winning economists aligned behind the efficient market hypothesis (EMH) and the orthodox methodology based on it. To Poundstone, and to many of his informants, the Kelly criterion seems to represent a Kuhnian paradigm shift just waiting to happen. What it will take to bring that about remains to be seen." http://www.siam.org/pdf/news/930.pdf ------------------------------------------ The key principles of kelly are quite valid and elegant IMO, it is how they are applied that needs to be carefully evaluated. For example, if you only bet 1% of your capital on an individual trade, no matter how big the fat tail is, your total capital is not wiped out -- (i.e. the MOST you will lose is 1%, non-margin). This makes a lot more sense than (parametrically) assuming (99.99% certainty) a max 5% individual loss and betting calculated opt f size proportional to this assumption, then getting a fat tail which wipes that assumption out. It's important to look at many scenarios which are not parametric, and observe how the opt terminal wealth varies over those scenarios IMO, then evaluate what the best approach might be under those considerations. Same goes for VAR. Another consideration is how to spread risk with the consideration of correlation between trading vehicles and volatility under high stress. P.S. Look forward to hearing more of RV's interpretation of turning finite duration losing streams into winning strategy via MM.
I think this post hits the nail on the head -- and exactly WHY we don;t see more of it. It isn;t that it is soo arcane (geometric mena maximation as an alternative to the mean-variance style models) but that the criteria of wealth maximization is a poor criteria -- it is NOT the fund manager's primary criteria. (Incidentally, the criterion of maximizing expected arithmetic average gain to variance, is a poor criterion too -- it merely: A. tends to be uniquitious because of the false prestige associated with it -and- B. Because it tends to be less aggressive than geometric growht maximization, tends to dispell geometric growth maximization as a viable criterion for institutions However (and this is not a plug) the most recent book I put out goes into specifically this -- what the primary criteria are, is something which is solved with the framework of wealth maximization -- that;s the REAL benefit of it, something the other mean-variance approaches do NOT and can not do.
As an aside, these very institutions that employed mean variance allocation models, were also, generally, employing VAR as a misk metric. We've seen the effects of that too.