Sunday, January 01, 2006

A Quote from Nassim Nicholas Taleb

Quote from A World of Randomness by Nassim Nicholas Taleb.

"Let us assume that the reader shared my opinion, that the market over the next week had a 70% probability of going up and 30% probability of going down.

However, let us say that it would go up by 1% on average, while it could go down by an average of 10%. What would the reader do? Is the reader bullish or bearish?

The best description of my lifelong business in the market is "skewed bets," that is, I try to benefit from rare events, events that do not tend to repeat themselves frequently, but, accordingly, present a large payoff when they occur.

I try to make money infrequently, as infrequently as possible, simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price.

In addition to my own empiricism, I think that the counterintuitive aspect of the trade (and the fact that our emotional wiring does not accommodate it) gives me some form of advantage.

One such rare event is the stock market crash of 1987, which made me as a trader and allowed me the luxury of becoming involved in all manner of scholarship.

Many traders aim to get out of harm's way by avoiding exposure to rare events - a mostly defensive approach.

I am far more aggressive than those traders and go one step further; I have organized my career and business in such a way as to be able to benefit from them.

In other words, I aim at profiting from the rare event, with my asymmetric bets."

Nassim Taleb is the author of the interesting book Fooled By Randomness that we have reviewed before.

Taleb can help you see the markets in a way that will both protect your wealth, and increase your returns.

Always read the books before you make a speculation.



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