Shared by JohnH

Great find from Christopher at http://www.scalavolpe.com
From 2006.

AT: Do you just have to deal with the emotional side of trading, or is there a way to minimize it?

NNT: I have to deal with it. My strength is that I’m emotional, but that’s also my problem. I’ve always wanted to be out of the markets, but I have this love for options.

What bothers me is not the trading but what comes with it — the emotions and dealing with investors. Trading is like chocolate — a little bit is good for you, but a lot [can hurt you]. It should be done in small doses.

Shared by JohnH

Wow, great find Christopher!

This article from The Forex Village contains some rare insight by Taleb on how he approached options trading.

Of all the information in the article, I think one of the biggest takeaways is Taleb’s point about how far out-of-the-money (OTM) options are likely not to be priced accurately.  Human beings created the option pricing formula.  Human beings have a very difficult time perceiving the likelihood of rare (and often catastrophic) events.  Thus, the option pricing formula does not perform so well when assigning values to far OTM options, since these options are attempting to capture the possibility of extremely rare events.  Ultimately, this undervaluing creates the potential for massive gains, like the one Taleb had in 1987.  

The Great Bank Robbery

Shared by JohnH

NNT mentions Bent Flyvbjerg as a colleague in a recent sample chapter from his new book.

Avoiding Black Swans

Any company that is contemplating a large technology project should take a stress test designed to assess its readiness. Leaders should ask themselves two key questions as part of IT black swan management: First, is the company strong enough to absorb the hit if its biggest technology project goes over budget by 400% or more and if only 25% to 50% of the projected benefits are realized? Second, can the company take the hit if 15% of its medium-sized tech projects (not the ones that get all the executive attention but the secondary ones that are often overlooked) exceed cost estimates by 200%? These numbers may seem comfortably improbable, but, as our research shows, they apply with uncomfortable frequency.

Even if their companies pass the stress test, smart managers take other steps to avoid IT black swans. They break big projects down into ones of limited size, complexity, and duration; recognize and make contingency plans to deal with unavoidable risks; and avail themselves of the best possible forecasting techniques—for example, “reference class forecasting,” a method based on the Nobel Prize–winning work of Daniel Kahneman and Amos Tversky. These techniques, which take into account the outcomes of similar projects conducted in other organizations, are now widely used in business, government, and consulting and have become mandatory for big public projects in the UK and Denmark.

“Black-swan funds run by Universa Investments LP and Pacific Investment Management Co., designed to protect against financial cataclysms, paid off this month as stocks took their steepest dive in almost three years,” Bloomberg reports.

A so-called black swan is an investment term used to describe an unforeseen market event that either positively or negatively impacts returns.

“Black-swan clients of PIMCO, manager of the world’s biggest mutual fund, saw gains this month of as much as 5.5 times the premiums they paid, according to Vineer Bhansali, a Pimco portfolio manager,” Bloomberg notes.

Further, Universa, a hedge fund founded and owned by Mark Spitznagel that consults with New York University professor Nassim Taleb, “had a 10-fold return this year through Aug. 8 on the capital in its black-swan accounts.”