Comment by lordnacho | Hacker News Reader

Comment by lordnacho | Hacker News Reader

Shortly before the crisis broke, Naseem Taleb came to the office to meet me and my colleagues. Hilarious character, and irreverent. He told us calculations were stupid and reminded us about ludic fallacies, narrative fallacies, and so on.

My colleagues still contrived to lose $250M over about 8 weeks, blowing up the firm and the investors. One investor lost his job immediately because of it. The money was lost in very obvious way, somewhat similar to what this guy was up to, a big options trade gone wrong, in a market that was not big enough for the biggest fish to escape.

What's sad is people understand the basic statistical principles. You don't know if the future will be like the past. Things move together in a crisis. The more independent tests you make, the more confident you can be in a result. (Ie if you can guess a daily coin flip right 55% of the time, that's better that being able to guess an annual coin flip 80% of the time.) And so on. But somehow investors are almost blind to everything other than recent return.

Yeah, but it's totally rational, if you look at it another way. The potential upside is that I make $250 M or $2 B dollars and reap some kind of bonus, right? And the downside is that I lose my job and somebody ELSE loses the $250 M.

If you don't care about anything other than yourself, why wouldn't you make that bet?

I don't think a lot of the traders are purposely thinking this, but the incentives are set up so that people who act this way are rewarded and start to dominate the decision making process.

Probably. But honestly, not losing your investors capital is priority #1. tl;dr Don't do stupid stuff like this.

> not losing your investors capital is priority #1

Recent evidence suggests otherwise.

Well, this is exactly what happened. One astute investor asked the only really important question (have you got your own money in this fund?) and managed to avoid the calamity. Everyone else got soaked.

Actually, if you speak to traders for any length of time, this kind of thinking comes out. The standard on the options trading floor is this:

I can buy options, and make money only if there's a crisis.

I can sell options, and make money most other years.

If I buy, and all the other desks sell, and there's a spike, all the money I make will be lost by the others.

If I sell with everyone else, and there's a spike, we can all say we did what the other people did when we are looking for a new job.

If I buy and there's a normal year, I'll lose and everyone else will gain, I'll look like an idiot and get fired.

-> Sell options, and act like you know when to get out of that position.

I wonder how much of an analogy we can draw to raising outside capital to fund your own venture.

Fund:

You get paid if nothing happens, traditionally 2% but probably lower on average these days. If things go well, you get 20% of the high watermark profits. If they go south after that, you don't pay it back. You're always paid in cash.

VC:

You get paid a salary that's below what you'd probably get in an established company, plus you get equity. But the investors will typically try to get preferred stock, in case things go badly (liq pref). If things go well, you can sell some shares at each subsequent round, but of course you have less after each. And some of the investors will want board seats, which means a degree of control.

> You don't know if the future will be like the past. (...) But somehow investors are almost blind to everything other than recent return.

Maybe because I come from the "wrong" side of the Berlin Wall, but as a guy who was only a kid when he saw a thing that was supposed to last forever (i.e. Communism) fall to pieces in less than a year it always surprises me when I see these predictions made for 20-30-40 years in the future, all promising a 5% or 7% return like there won't be any new World War, any new nationalizations on a continental scale (see Russia after 1917 or China after 1945) or no new Spanish Flu.

Yeah, I don't believe in long-term predictions unless they're predicated on human nature itself. That never seems to change. So, in IT, economic principles like squeezing more ROI out of investments, backward compatibility, lock-in, and ecosystem effects were good indicators of what would stick around & how it would change. Past that, it was a bunch of crap shoots all thrown onto same table overlapping.

Said company suddenly going out of business is more black swan than anybof those things

If the revolution comes, you lose regardless of your investment strategy.

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