^^I know that appears to be true, but as you say it is due to institutional structure which changes much more slowly than an individual investor’s views on what to pay for what. The problem is that these kind of strategies appear to work “year in, year out” until they all of a sudden don’t. When they don’t, they have usually built up so much confidence from the previous consistency that an undue amount of funds have been allocated to the strategy because the risk was not properly understood. I have definitely seen this happen, which is why I think it is smart to put hard limits on how much to put in any strategy no matter how “safe” or “consistent” it appears.
Mobius Striptease Wrote: ------------------------------------------------------- > LOL lol Lol LMFAO @ every1 in this thread… lolz a/s/l please.
eureka Wrote: ------------------------------------------------------- > ^^I know that appears to be true, but as you say > it is due to institutional structure which changes > much more slowly than an individual investor’s > views on what to pay for what. The problem is > that these kind of strategies appear to work “year > in, year out” until they all of a sudden don’t. > When they don’t, they have usually built up so > much confidence from the previous consistency that > an undue amount of funds have been allocated to > the strategy because the risk was not properly > understood. I have definitely seen this happen, > which is why I think it is smart to put hard > limits on how much to put in any strategy no > matter how “safe” or “consistent” it appears. +1 This is exactly what happened, time and time again. Most people here should be old enough to remember what happened at LTCM. How many times did quants make the exact same mistake? Need I go into 2008? There was no ‘new’ lesson in 2008, it was the same story that was repeated dozens of times since LTCM.
What happened in 2008 had nothing to do with what happened in 1998.
DanLieb Wrote: ------------------------------------------------------- > As a Quant (not in trading, though), I loved the > book. > > All I can say is we continue to make the same > mistakes we made two years ago. I am convinced > most Quants just don’t ‘get it.’ Human behavior > can not, and will never be modeled by what Ph.D.'s > in Physics study. Good observation, and a great example of the next area to dominate the halls of WS; behavioral finance. I studied this briefly in grad school where economics is being infiltrated by psych ninjas who are breaking down the grey area between math and human behavior. The most current Nobel Laureate , O. Williamson uses bounded rationality as a cornerstone of his studies and the classical economists are digging their heals in defending math ala U. Chicago.
Well, since my Ph.D. is in Behavioral Economics, let me know where they are hirinng… Time for Danny to make the $10,000,000 the stupid quants used to make, while destroying the economy.
DanLieb Wrote: ------------------------------------------------------- > Well, since my Ph.D. is in Behavioral Economics, > let me know where they are hirinng… Time for > Danny to make the $10,000,000 the stupid quants > used to make, while destroying the economy. With a PhD in Behavioral Econ, you should be able to get a FT teaching gig at your local community college.
Reggie Wrote: ------------------------------------------------------- > Yeah but working in major banks/hedge funds isn’t > natural human behavior. Many of them have their > employees work under strict guidelines, hence some > super smart people are able to take advantage of > this. I really think there are people out there > who have created algorithms that can beat the > markets on a consistent enough basis that they are > profitable year in and year out. Their models would have to model what OTHER BANKS are doing… reductio ad absurdum, and the system can not converge. (And you have 1000 pt drops in the market…)
Do you really have a PhD in Behavioral Econ? Is it your emphasis or the actual degree title? I really enjoyed the behavioral econ class I took in grad school but unfortunately it hadnt been widely accepted yet when I was there in 2004. Matt Rabin was my profs thesis advisor.
Biz Banker, can you please send me a LinkedIn invite? (or FB if you are not in LinedIn.) I am the Daniel Lieb in Charlotte.
mo34 Wrote: ------------------------------------------------------- > Mobius Striptease Wrote: > -------------------------------------------------- > ----- > > LOL lol Lol LMFAO @ every1 in this thread… > lolz > > > a/s/l please. 
BizBanker Wrote: ------------------------------------------------------- the classical > economists are digging their heals in defending > math ala U. Chicago. EMH all the WAY, baby
mo34 Wrote: ------------------------------------------------------- > What happened in 2008 had nothing to do with what > happened in 1998. Did you read the book, MO, or are you just acting like a jerk this week?
DanLieb Wrote: ------------------------------------------------------- > mo34 Wrote: > -------------------------------------------------- > ----- > > What happened in 2008 had nothing to do with > what > > happened in 1998. > > > Did you read the book, MO, or are you just acting > like a jerk this week? I took the FRM where they have an entire chapter explaining the differences between the two cases. It’s about risk management after all. But don’t take my word for it, if you read the book, you probably know better.
Think more abstractly MO. I read those sections of the FRM study guides as well, too. Leverage + “Poor” Models built by people with math expertise that forget that the future might not look like the past = bad outcomes.
“They were modeling home prices to go up between 6-8% in perpetuity”. Kyle Bass who shorted the housing market and made a killing. They being quants who didnt have experience in business or the markets so relied on historical estimates since the Great Depression. Anyone who knows business knows that if there is demand, it drives prices up. Artificial demand can be created by finding a source of funds and selling through a series of intermediaries who manage their risk by holding inventory for short periods of time and off loading it. Ponzi lending takes hold by shortening the holding period, which banks did by creating warehouse lines to “mortgage companies” and creating tranched structures that fit well into the model of senior being protected from contraction risk while supports just waited and thought they were accruing returns or had longer holding periods. The CDO structure masks the true nature of the underlying because the some of the theoretical assumptions could be explained away.
mo34 Wrote: ------------------------------------------------------- > What happened in 2008 had nothing to do with what > happened in 1998. Really? Here are 3 of LTCM’s core mistakes: 1 - Dogmatic belief that previously observed relationships (i.e US yields and foreign sovereign debt yields) would persist in the future. 2 - Overconfidence in models – they were completely unprepared for “Black Swan” Events not considered in their models. 3 – massive leverage – their convictions were overwhelmingly strong, so they took massive bets The same basic mistakes helped cause the credit crisis. Few people considered that real estate prices, mortgage default rates or correlations could change dramatically in a short time. Models were built based on bad assumptions. Banks and HF’s had 30/1 or greater leverage ratios and got slaughtered when actual outcomes differed from predicted outcomes.
This is a so-so book unfortunately. Author often times can’t distinguish between long and short. He mistakenly thinks long CDS contract = write the insurance contract. Lots of hype; not much of the substance. I like Henry Paulson’s book a lot - On the Brink.
Dr. Lieb, You were in school for a really long time.
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