Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 10:
1. If your metric is not useful during times of crisis, then your metric is simply not useful.
1. If your metric is not useful during times of crisis, then your metric is simply not useful.
Many metrics are some variation of reward divided by risk, where 'risk' can be further broken down as: measured risk divided by hidden risk.
If you increase your hidden risks, it artificially increases your reward to risk ratio.
If you increase your hidden risks, it artificially increases your reward to risk ratio.
It's very difficult to increase the expected return, so many will increase hidden risk in order to provide the illusion of a high reward-to-risk metric.
2. Madoff could have been identified as a fraud by simply measuring the *lack* of extreme movements / volatility.
The following tweets are from the final lecture of #RWRI called 'Parting Wisdom,' which is a summary of the key points of the program.
3. The world is more fat-tailed than you perceive.
4. Everything you do has some sort of convexity bias. This is the theme of #RWRI and is applicable to virtually everything in life.
5. It is better to be convex than smart.
6. If you're going to measure something, measure the *extremes*
For example, you get a much better idea of the distribution of wealth by looking at the extremes vs looking at the average.
For example, you get a much better idea of the distribution of wealth by looking at the extremes vs looking at the average.
7. High returns with no volatility is a route to bankruptcy.
A crisis is good for a company because it teaches it how to be fit for survival.
A crisis is good for a company because it teaches it how to be fit for survival.
8. Cutting the tail (e.g. buying insurance) is cheap. Not surviving is the ultimate expense.
9. In a fat-tailed world (i.e. almost everything), you need the full population to figure out the properties. A sample size is not representative (and thus misleading).
10. "Distance from worst" is potent information.
Don't look at where you are now. Rather, look at what the worst case scenario is, and cut the tail.
Don't look at where you are now. Rather, look at what the worst case scenario is, and cut the tail.
Reverse stress test: rather than asking 'what will happen if the market drops 20%,' instead ask: 'what will make me drop 20%?'
11. Nobody blows up on known risks. Tail risks are what get you.
Go against the grain, because the crowd doesn't understand tail risks.
Go against the grain, because the crowd doesn't understand tail risks.
12. Evidence of absence does NOT equal absence of evidence.
For example, zero evidence of mask effectiveness is NOT the same thing as evidence of zero mask effectiveness.
For example, zero evidence of mask effectiveness is NOT the same thing as evidence of zero mask effectiveness.
13. A fool thinks the tallest mountain he's seen is the tallest mountain that there is.
14. Don't try to quantify risk. Instead, work with the bounds / properties / distribution. Consider what *can* happen, not what *will* happen.
15. Five consecutive one-year options are much better than one consecutive five-year option.
16. Don't try to optimize your allocation - anything that is optimized is fragile.
17. The more precise a regulation, the more arbitrageable it is.
18. The shadow mean does NOT equal the observed mean. The difference between the two increases with fat tails.
19. Correlation is not even correlation.
Correlation in a fat-tailed world is meaningless.
Correlation in a fat-tailed world is meaningless.
20. Starting a business has optionality and convexity. Measure the downside first, and find the upside through trial and error.
21. Never listen to academics, unless it is on how to be an academic.
22. Humans are good at evaluating the binary, but not payoff functions.
23. Anecdotes are not to be dismissed - they show you that something is possible.
24. Only the hyperparanoid survive.
25. In any contractual thing, there is a suckor and a suckee. If you don't know who the suckor is....... check the mirror.
26. Dynamic >>> Static. This is the problem with behavioral economics / psychology: they are static.
27. Island stabilization law: if you want to do GMOs, do it on an island.
If you want a diversified portfolio, invest on an island that is isolated from the rest of the world.
If you want a diversified portfolio, invest on an island that is isolated from the rest of the world.
28. Speed heuristics work under defective models.
A biased ruler doesn't prevent you from identifying variations.
A biased ruler doesn't prevent you from identifying variations.
29. Measuring the size of drawdowns >>> measuring volatility.
30. Don't buy the Ferrari if you can't afford insurance.
31. Never say "let's assume..." or "all else equal"
32. Multiscale survival: the survival of humanity is more important than the survival of a nation, which is more important than the survival of a family, which is more important than the survival of an individual.
33. Individual rationality often does not scale up to the collective level.
34. The level of harm is convex to the level of concentration of anything (ammonium nitrate, water, etc.).
35. A goat beats a Ferrari on rocky terrain.
What's best for one domain is cannot be extrapolated to another domain.
What's best for one domain is cannot be extrapolated to another domain.
36. Sleep test: don't do things that prevent you from sleeping well at night.
If it will negatively impact your sleep, don't do it (it's likely a tail risk).
Example: hiding things from the IRS. Just file your taxes 100% honestly and sleep well at night.
If it will negatively impact your sleep, don't do it (it's likely a tail risk).
Example: hiding things from the IRS. Just file your taxes 100% honestly and sleep well at night.
37. A huge thank you to @nntaleb @normonics @financequant @ArieHaziza @TarekMilleron @VergilDen @trishankkarthik @joe_shipman, all other presenters for the compelling content, all organizers for moving #RWRI online, and all the participants for such engaging discussions.
