Sports?

I once won an award for a website that I created with a team that focused on unusual Olympic sports (woah!).  Here are some more unusual sports:

• Kyz Kuu - "Kyz kuu or kyz kuumai, literally "girl chasing", is a traditional sport among the Azerbaijanis, Kazakhs and Kyrgyz."
• Buzkashi - "Buzkashi is often compared to polo. Both games are played between people on horseback, both involve propelling an object toward a goal, and both get fairly rough. However, polo is played with a ball, and buzkashi is played with a headless goat carcass."

Betting/trading strategies- Sizing

One of the mysteries facing finance professionals is how to reconcile the quantitative with the qualitative/discretionary. I actually think most gambling professionals do this quite well (eg. bet sizing on poker)- this may be because the risk/reward is much more well-defined (vs investing). I would like to propose a system to conduct position sizing that integrates the qualitative with the quantitative.


this is dependent on 3 things. 

(1) how risky the thing is on a daily basis (ie. can go up/down by $1 vs $100)
(2) how much conviction you have (ie. i would do something like, 3 conviction levels, lowest = believe can get 5% Return on Risk, mid = 10%, high = 20%)
(3) what is your intended time horizon (or alternative way to say this is take profit/stop loss level)

Then (4) plug into kelly's criterion and take 1/2 kelly as position size

So taking aapl as an example:
(1) daily range is say $15
(2) say you have high conviction (ie. you believe you can make $0.2 vs every $1 you risk, as an average of many bets with this level of conviction. this could mean you make $1.2 half the time vs lose $1 half the time, or that 60% of the time you make $1, and 40% of time you lose $1). I think these conviction levels make sense. 5% = any lower and you should definitely just put it in cash/ST bonds. 20% = anything higher and this is a once in a lifetime/decade type trade, where you really just plunge as much as possible (and sizing is to make sure you can maintain exposure in face of MTM losses)
(3) let's say your intended time horizon is 1yr. then yearly vol is $15 *sqrt(252) ~= 240. this sounds about right (eg; this yr aapl range was from 380-700) 
(4) so every share of aapl (550), you may make +290 (240*1.2) vs lose -240. kelly's = EV/win = 50/290 = 0.17. which means that you should risk 17% of your portfolio.
taking half kelly to be conservative, that is 8.5% of portfolio. which means amt of AAPL shares to buy = your total portfolio value * 8.5% / 240

so eg: on 1mil portfolio, you should buy 355 shares of aapl (195k) if you intended to hold it for 1yr+ and have medium conviction on it. this is about 20% of your portfolio, which is very aggressive sizing already. for long/short equity, anything 10%+ would be considered concentrated. the reason why it is high here is because you have super high conviction assumptions. 


note that
(1) we havn't looked at portfolio correlation yet, which would involve dialing down sizing if you have similar exposures.
(2) this # that we got is the MAX risk you should ever take. ie. anything more is theoretically bad for you (ie. your LT returns will be lower than if you just took less risk). so depending on how risk averse you are, you should be sizing significantly less than kelly. (eg: you could always size 1/4 kelly)

(3) can play around with the skew/kurtosis of returns to get a different sizing. In fact, all the steps above are actually asking you to describe a probability distribution of your return for this trade. (1) is asking for stdev, (2) is asking for mean, (3) is looking at how returns scale with time (is there autocorrelation?) which is also going to be related to kurtosis in this case (+ve autocorrelation = higher kurtosis compared to standard assumptions when scaled up with time) (4) is asking about the skew (are you 50% to win 1.2 and 50% to lose $1, or are you 60% to make $1 and 40% to lose $1)

The most useful things I learned in one summer internship...

In Google Chrome:

1. Ctrl-L brings you to the URL bar.  Think of all the time you'll save not having to move your hand from mouse to keyboard everytime you want to go to a new website.
2. You can 'train' Chrome to remember how to search a website.  As an example, go to Amazon and do an empty search.  Then, when typing amazon into the url bar you can press tab and enter a search that will be performed on amazon.  I find this really useful for browsing Wikipedia.

Happy holidays.

Breaking down the Black Box

This is a bit of a re-blog of other people's work, but I think most people would find this interesting.  Below are some articles that I enjoyed because they take a complicated piece of software and break it down into understandable, bite-sized chunks.  Check these out by your leisure, but note that they're ordered by their inclusion of domain specific knowledge:

1. Siri
2. Dark Sky - Tells you when its going to rain.
3. Divvy - An app that tells you how to split a check with a group of friends.  The process of OCR is far more complicated than I had ever imagined.  Note: the diagrams used are 'state machines' or basically a graph of states with transitions (actions) to other states, and A* is an algorithm to find the best combination of choices given some function to estimate their proximity to some goal (ie: number closest to 0).

The liberator who destroyed my property

"Tell him. Tell him, the liberator who destroyed my property has realigned my perceptions." - Tyler Durden

Not to get all "Fight Club"-ey on you guys, but we need a little destruction in the world every now and then. 

The terms "hormesis" and "mithridatism" refers to the intentional exposure to toxins in order to strengthen the body. There is evidence you can cure some allergies or gain immunity from certain poisons this way. The cost usually isn't worth it (you can become disabled or die), but it makes sense in certain situations (e.g. you are a dangerous animal handler by profession).

This means that certain things, although dangerous in large doses, can be beneficial in small doses. Physical labor can cripple you, but it can also make you stronger. Permitting small forest fires to burn instead of fighting them will reduce the amount of flammable material left for uncontrollable large forest fires. What doesn't kill you makes you stronger.

Schumpeter called the disruptive innovation of entrepreneurs who displaced established economic orders "creative destruction". It's the process that destroys in order to create. In that vein, everything must be fallible, whether it's a bank, a forest, an individual, or even a government.

According to Karl Popper, the difference between science and religion is that science can be disproven - he called this "falsifiability". Any scientific statement can be disproved given good enough contra-evidence. In other words, no scientific fact is "too-big-to-fail", and for good reason: practically everything we know from science that has been proved has been disproved and replaced with something better (e.g. Newtonian mechanics -> Relativity -> Quantum mechanics -> ???).

Nothing lasts forever - least of all complex systems such as government and economies - so why do we persist in believing that it should be otherwise?

I am not merely advocating allowing failure. We should actively create it. Instead of merely permitting forest fires, what if we deliberately instigated them? In wildfire management, "controlled burn" is known as the practice of intentionally lighting small forest fires. This has been proven to be more effective in reducing the inherent instability within forest than fighting every fire that comes along. However, at a certain point, a forest becomes too flammable for this strategy to work: in other words, the forest has become "too-big-to-fail". We tried to let Lehman burn, but it was already too late: the forest was too flammable.

Micro-fragility leads to macro-resilience. This is where the regulators and Elizabeth Warren and Occupy Wall Street and practically everyone else is getting it wrong: we shouldn't be making failure harder, we should making it easier.