Great points. Taleb's system is not winning either - the point of this threads' question. One more point. LTCM was taken out by other traders who guessed their methodology and pushed them off the cliff as I seem to recall reading. Arrogance fails. Humility wins. The efficient market will baptize you BIG TIME when they figure out what you are doing. That is why in my previous discussions of an edge, I am quite careful not to reveal factors that I consider hard-won hard-to-learn critical success factors.
With respect, I would consider this comment pure hindsight bias. In an alternative reality, we might be praising LTCM as "the smartest guys in the room". Just my two cents worth.
I think your comment is a fair one in terms of my ability to see the probabilities. It is way above my pay grade and beyond my capability. I did not mean to suggest i saw it. But I do not think it is hindsight bias to say that we have seen those who leave context -- particularly cultural context -- out of their models were predictably playing with fire. And I suspect there were quite a few major league players who contemporaneously saw that event risk in a gangster society needed to be more heavily factored. In an alternate reality almost every bust out might be praised as the smartest guy in the room. The problem at LTCM was that they invented an alternate reality that perceived that a savage society had become civilized (in investment terms) in a decade. They should have thought in terms of five or ten decades. I'm not criticizing the numbers they crunched; I'm pretty sure i would not understand them. I am suggesting that it takes more than the math to win the game they decided to play.
You're right about russia, but their models had an even more fundamental flaw. They start with the assumption that people are rational and the market has normal distribution... these assumptions make your life easy when creating a mathematical model since it is very hard to factor human nature (not rational) into a model or wild fractal chaos... but it is also the model's aquile's heel.
Ooh yeah! The Street's vultures made sure to pick LTCM clean when they started losing control... thats one thing the market is good at... helping a distresed participant lose a lot more than he intended... about the market being efficient... I tend to side with Soros in thinking that it isn't and prices are not in equilibrium most of the time...
I completely agree with you. (LOL sorry! I know that in fine ET tradition, I am supposed to call you names and argue particularly when I know I am wrong.) At the risk of sounding arrogant (see a previous post) these are the two lessons that I took from their defeat: 1) Almost all knowledge/science today uses models. The only model of the universe that is completely accurate is that universe itself. Simplification brought their downfall at a higher level. This is a common failing of our education and government systems - simplifying until they lose the point in the simplification. A model is like the market, it is not the market. 2) Being intelligent is a handicap you have to learn to overcome before you can trade well. Never believe totally your own story. I think that there are other lessons and many corollaries in this story as in all such stories. There but for the grace of God go us all.