JabairuStork,I totally agree with you that the second billion is made within a different probability space. It is the causal factors that underpin that different probability space that concern me. Success (whether by luck or by smarts) seems self-amplifying.The problem is that the average bounded-rational evaluator is incapable of distinguishing between lucky and smart forms of first-time success (and usually errs toward the presumption of intelligence). Thus, once someone is successful, they gain access to resources unavailable to the not-successful. This is most obvious for the case of serial entrepreneurs -- being successful in one business gives them an advantage in attracting both capital and skilled personnel to follow-on businesses. But even traders enjoy a form of success to the successful. Successful traders have the asset base needed for proper risk management and value-added services. I'm appalled by the number of low-cap traders who want to learn trading use $5000 for fully leveraged trading of the e-Minis or who swing-trade a single stock because they cannot afford to diversify. In contrast, better capitalized traders can diversify. Moreover, successful traders also can access premium services that give them further advantages (e.g., high-end data services, dedicated high-speed connections to markets, lower-cost brokerage services, priority customer service, lower margin interest rates, etc.). Another case of success to the successful.And, at the upper-end are world-renowned investors/traders (e.g., Buffet, Soros, etc.) whose actions create favorable self-fulfilling prophecies. Although I would never wish to detract from their success, I would argue that they could use a dart-board to pick take-over targets and still earn market-beating returns.RE: consistently and perpetually earn above market returns: I think this becomes a matter of deciding which of four hypothesized failure mechanisms is the cause of inconsistent returns. H1) Failure is due to the end of luck: If the markets are random, then success and failure is a simple stochastic process. Given the large numbers of participants in the markets, it is inevitable that some will appear to produce above average returns for above average lengths of time. Yet, at each time-point they would have the same chance of future success as everyone else.H2) Failure is due to rigidity: If the markets contain slowly-varying non-stationary patterns, then above average returns are possible by those that synchronize with those patterns. Yet with increasing success would come increasing confidence. Increasing confidence would lead to increasing risk-taking (e.g., use of margin) and increasing rigidity. An eventual shift in the market's underlying patterns would lead to above average losses as the previously successful trader stubbornly adheres to previously successful methods.H2) Failure is due to excessive size: The market may contain consistently exploitable patterns of bounded size. As the successful trader compounds their assets (by trading or by soliciting other peoples money) they would eventually exceed the profitable capacity of the pattern. They would appear to lose their edge and slip back into mediocrity.H3) Failure is due to the rise of imitators: As successful traders become more visible, they become the subjects of imitators. This failure mechanism is exacerbated if the trader operates within an organizational context (e.g. proprietary trading firm or professional investment/trading firm). Peers and coworkers will inevitably learn the successful trader's techniques and imitate them. Personal ego also leads to the rise of imitators as the pride of the successful leads them to grant interviews and pontificate on their success. RE: Scale invariance: Interesting issue! It would seem to me that the high-frequency realizations occur within some approximately stationary stochastic environment, while the lower-frequency realizations are governed by the more deterministic self-modifying/adaptive nature of the markets. Admittedly, that statement is more descriptive, than prescriptive. The challenge for the dedicated trader is to uncover and exploit the structure of the temporarily-stationary stochastic environment while adapting to the inevitable shifts in the market's pattern of price action.Thanks for making me exert my bounded rationality on this problem. I'm trying to determine if H1 is true, while avoiding H2,H3, and H4.
Last edited by Traden4Alpha
on October 3rd, 2002, 10:00 pm, edited 1 time in total.