The stories they trade on…

May 30, 2007

Interesting post picking up on a point by Derman about evaluating traders in terms of the stories they trade on. Suspect this would horrify empirically minded traders like Taleb and Niederhoffer. For Taleb, stories are just noise, inductive reasoning straight out of Mediocristan. And for the Galton influenced Niederhoffer, counting is everything.

If we take a Taleb style epistemological perspective, Derman is putting too much focus on a priori reasoning.

One Response to “The stories they trade on…”

  1. jd long Says:

    That’s the EXACT thing Taleb rails against.

    “When we evaluate traders, it’s crucial to judge the stories they trade on. Looking only at their profit and loss statements is a recipe for disaster.”

    So the person who has no story is totally rolling the dice and the person with a good story is rolling the dice but is deluding himself into thinking that he is smarter than the market.

    While I think that double delusions are not better delusions, I have seen in corporate America that having a good story backed by a concrete anecdote is FAR more powerful than great empirical analysis. In other words, reading and applying “Made To Stick” got me farther than reading and applying “Learning and Practicing Econometrics.”

    The royal flush, however, is good analysis that makes a good story and has a concrete anecdote. As we say in the South: That right there is some good stuff… ummm hummmm.


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