Thursday, November 5, 2015

"At war with luck" - great way to describe active management

Are you, as David Sklansky the poker player would say, "At war with luck"? This issue was analyzed in a recent Game Theory posting in the Economist. The article focuses on the role of skill versus luck in poker. A recent research piece showed that 76% of a sample of over 100,000 hands of poker were determined before a showdown, that is, before cards were revealed. 49.7 percent of the best possible hands that could have been made were folded before a showdown. Poker is often won or lost by in-game decisions and not by luck at the end. As has been commented in other places, you can deliberately lose at poker. That is not the case for a game of luck. Hence, there is skill with poker.

The same can be said with trading. Most of the gains or loses are made through in-game decisions. You can get stopped out, you can take profits, you can size the trades wrong, you can act before your forecast is realized. There are a host of decisions that will determine your success before you even get to the point of measuring whether the market had gone in your direction. 

This is not an issue of gambling, but rather your skill at money or risk management and you ability to read the situation. Hedge fund managers never like to talk about the association between poker playing and trading but the analogies are real. 

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