protagonist wrote:VictoriaF wrote:
Taleb has noted that if 20% of people perform 80% of work, then 1% of people perform 50% of work. He applied inductive reasoning as follows:
- 20% of people -- 80% of work
- 20% of 20% = 4% of people -- 80% of 80% = 64% of work
- 20% of 4% = 1% of people -- 80% of 64% = 50% of work
Thus, high-fliers are the ones who are "working" to support casinos.
I haven't read Taleb, but from what I have read here (correct me if I am wrong), I assume that, like myself, he is mainly regurgitating chaos theory as applied to finance and human behavior, Unlike myself, he has become rich and famous in doing so. Again, correct me if I am wrong, but I doubt if he would put faith in models projecting 20-50 years into the future based on 100 years of retrospective data.
Taleb is not referring to the chaos theory. He relies on his empirical knowledge of the markets having worked on the Wall Street and the Chicago Mercantile Exchange. In this line of work he has observed many unpredictable events that shook the markets, and he has noticed that these events were not foreseen
a priori but were trivialized with
a posteriori explanations. Taleb is well read in several languages including English, French and ancient Aramaic. Once he started looking, he saw Black Swans everywhere. His broad historical, philosophical and financial perspective is what makes his books fascinating.
You are correct that Taleb would not put faith in models projecting into future. He is
very skeptical of models.
protagonist wrote:VictoriaF wrote: According to K&T's Prospect Theory, people are risk averse for certain gains and risk seeking for certain losses.
Victoria
That is, I think, fundamentally fascinating stuff that may be (to a large extent) scientifically testable, and may have bearing on how we (many of us on this forum, maybe including myself) are approaching this impending potential crisis. I don't know anything about it, but it sounds interesting. Can you explain, including, if possible, any relevance you see to the point of this thread (our investment approach to tomorrow's possible "ëvent")?
Kahneman's and Tversky's work on judgement and decision making under uncertainty is, in fact, highly testable. Kahneman received the 2002 Nobel Prize in the Economic Sciences for this work; sadly, Tversky died in 1996. Curiously, Kahneman is a psychologist, the prize is in economics, and economists have a tendency to look down at psychologists.
I am an amateur. I read a lot Behavioral Economics and I am trying to fit BE ideas in my work.
In my opinion, with respect to tomorrow's markets--the day before a potential Default,--the most likely human bias is the
status quo bias. People will stay with what they had for the past few days, remaining either in or out of the market. Another relevant bias is
loss aversion. Those who got out of the market in anticipation of the default can't (psychologically) get back because that would solidify their loss. Those who stayed in the market have aversion to potential losses if the markets take off on good news.
Important note: The psychology of Behavioral Economics relies on well-designed controlled experiments and is published in respectable peer-reviewed publications. However, the
derivatives of this work, like the arguments I presented above--and like much of Behavioral Finance,--are speculative and have not been tested. In reality, people are subject to
multiple simultaneous biases, and some of these biases may be pointing to
opposite choices. It's difficult to tease out which biases would prevail and which behaviors would follow. For example, some bad news may set of a panic; those currently in the market would start selling, and those who are currently out of the market may start buying soon after the price drops below that at which they have sold (the latter being a bias of the "certainty of gains").
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)