Daily Speculations

2003

The Biggest Mistakes

 

The biggest mistake in trading, based on my experience, is to concentrate on such things as Hurst exponents, regression  coefficients, proper Fourier series, chaotic or stable, normal or paretian exponents to raise survival distributions to, waves, fractals,  et al. After you find it, what do you got but a barrel of retrospective nothingness? The key is to find a measure that can calculate often and independently and then to use it to predict – predict, not describe.                            

 

Philosophic memories, longings and the expectations of the market are of great interest, but I have found that queries as to whether they trend or reverse and their accord with the theories of Prechter or Fibonacci or Eliot merely a distraction to the profitable pursuit of trading happiness. You could put 100 of the smartest academics in the world in a room and let them try to predict the market for 100 years, and unless they were steered on a01 predictive, calculating and readily adjusted path, one that takes account of uncertainty and ever-changing cycles, they would achieve below-random results. Experience with the numerous professors that the Wiz and I have hosted and supported in our office have not disabused us of this conviction. May I issue a clarion call for an emphasis on predictive distributions rather than descriptive things. (Victor Niederhoffer, September 2003)

 

Dr. Brett Steenbarger responds: May I add my own fervent wishes for consideration of philosophy of science, particularly the understanding of the nature of prediction that is the hallmark of Austrian economics.  Having recently immersed myself in mechanical trading systems designed with TradeStation and the like, I have gained an increased appreciation for Hayek's critique of scientism and his recognition of the futility of prediction without understanding.

 

Just as scientism -- the notion that human affairs are as predictable as phenomena in natural science -- leads to social engineering and the mendacity of socialism, so I suspect scientism in the financial markets possesses its unintended consequences -- and generates its own departures from efficiency, much to the potential benefit of speculators able to discern science from "pretence."

Further reading: F.A. von Hayek, “The Pretence of Knowledge,” available at: http://members.shaw.ca/competitivenessofnations/Anno%20Hayek%20Pretence%20of%20Knowledge.htm

 

 

 

The biggest mistake in business is getting in over your head. The biggest opportunities come when someone else gets in over the head. It is bittersweet for me as I write this to think of Tom Wiswell, and shed a few tears. he'd always look at me in the middle of our checker games, and say, "Vic, I'm in over my head. I better simplify." 

-- Victor Niederhoffer, June 2003

 

 

Grandmaster Nigel Davies writes: "Petrosian was the great master of prophylactic chess strategy, which involves nipping potential danger in the bud before it even appears. The methods one can
use to do this include simplification ... but also the process of repairing weaknesses even when there seems to be no urgent reason to do so. To those who only want to defend when the enemy is at the gates this seems 'negative', 'passive' etc etc. But it gave him a level of control in his games which led to great consistency."