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Torture in the Markets, by Victor Niederhoffer

No one shall be subjected to torture or to cruel, inhuman, or degrading treatment or punishment
-- Universal Declaration of Human Rights, UN, Dec 10, 1948.

The violent and cruel moves of the market from mid May to July, with the excruciating pain of the first 20% decline in the first week and a half, the fake relief rally during the next week to June 2, the even more horrible decline of the next two weeks, with the gradual rise to July 4, leaving most markets within a single digits of their old high, still up substantially on the year, has all the earmarks of the torture techniques perfected in the times of the Roman Caesars, used throughout the world for 350 years during the inquisition, and now coming back into prominence in conjunction with the treatment of Iraqi prisoners in Guantanamo Bay.

Like Senator McCain, who was exposed to physical and mental torture by the Vietcong and now is one of the leading advocates of its abolition under any circumstances, even if the ticking time bomb is at issue, I have had direct experience with many of the techniques of financial and psychological torture that these moves have inflicted. I thought it might be well to reflect on the instruments and techniques of torture so that I and others would not be subjected to such pain in the future, and possibly to induce the inflictors of torture to give up such activities in the future.

Let’s start with the most famous historical cases of torture, those inflicted by Spanish Inquisition which from its inception in 1480 to its end in 1808 registered the following statistics:

Burned alive 31,912
Burned in effigy 17,659
Subjected to severe
pain and penance 291,450
(Source: Knox, op. cit)

The main initial instruments of torture used by the Spanish appear to have been the rack, the wheel, the thumb screw, and the water torture. These created so much pain and damage that a confession and recanting was almost always obtained. A common feature of these tortures was the compression and stretching that these machines inflicted on the human body, which was not made to withstand forces of this nature. The financial body of most people is not made to withstand the forces set by a 10% decline, especially when leverage is used or the money has been recently invested at the top. The firsts 10 to 25% declines in the markets did elicit capitulation and recanting from investment in stocks from all who had the least vulnerability to such.

One of the terrible things about torture is that it hurts so much that when it's over great relief is felt. That's when the guard is lessened. The Spanish perfected a technique to prey upon the weakness that occurs. It was the "no hard feelings either way, now we're all friends again. Just embrace us and this peaceful statue of the Virgin Mary" gambit. A nice description of it is contained in one of my favorites, a 942 page, 125 year old book, The Underground: Or, Life Below the Surface, 1880, profusely illustrated, by Thomas W. Knox. After the heretic had recanted, he was told that now that all was forgiven, he should kiss the statue to prove his sincerity.

As he went to obey the injunctions, he placed his foot in front of the image and his weight fell upon a board which touched a spring. The arms of the statue were instantly closed about him; knives were thrown from these arms; and he was pressed against the breast of the figure. Pierced in many places, the recanting heretic yielded his life

A related mode of death just when it was felt that the torture was over was to encourage the victim to descend a dark stairway where sustenance and relief might be found. The stairway would suddenly give way and the victim "was precipitated upon rows of spears fixed upright.”

To put it in perspective consider a few markets, typified by India down from 12,500 on May 12, to 10,000 on May 20, up briefly to 10,500 on June 2, then down to 9,000 on June, 14, now up to 10,700 with comparable moves in the US down from 1330 on May 12, to 1260 on May 20, back up to 1285 on June 2, then down to 1220 on June 11, then back up to 1280 as of July 2, or Japan, down from 17,500 on April 15, to 15,600 on May 23, then up to 15,915 on June 29 then down to 14,218 on June 13, now back up to 15,600, or Egypt at 60,000 on April 12, then down to 45,000 on May 14, false rally to 49,750 on June 2, then back down to 43,000 on June 10, now back to 44,640 as I write.

There is a reason that torture has been used throughout history to extract confessions. The main illegitimate one is that an atmosphere of terror and punishment is necessary to maintain leaders in power when their positions are not due to voluntary behavior on the part of their constituents, whether they be political or supplicant. The main legitimate reason is that often the harm that would come from not being able to extract a confession is infinitely greater than the harm that comes to society from acting in a humane way. Consider for example the not so hypothetical case of the prisoner just taken who knows the whereabouts of a ticking time bomb that will be deployed in one hour that will destroy a few million inhabitants of a city. Are the gains to be made from respecting the prisoners' rites and other innocents who don’t know of ticking time bombs that much greater than the loss of life from one who knows of a ticking car bomb destined to go off in the middle of a city? The Israelis have a name for such a situation "The Ticking Time Bomb” problem. You see terrorists are often captured with information of just such a nature.

The torture that was inflicted on market participants must be considered within the backdrop of what happened in Arab markets. Markets like Dubai and Saudi Arabia had already dropped some 50% before the first rumblings of havoc were unleashed in the US. Such markets as the 10 year bond market had moved from 4.8 % yield to 5.2 % yield in the previous several weeks, the price of gold had registered some $720 an ounce up from $600 an ounce a month earlier and Silver was over $15.00 an ounce. There was every reason for the grand inquisitors in this case to consider that there was a ticking time bomb problem here and that some staged jawboning of inflation while it might administer torture to many market participants was in the long term interests of a more orderly economy.

The most common and famous form of torture through the ages is the Chinese water torture. The Chinese water torture consists of the combination of restraint applied to the victim while he is held upside down and a quart of water is dripped into his throat slowly asphyxiating him drop by drop with the certain knowledge that the next drop will be worse than the previous until the end.

Markets seem to adopt this method of torture the most often also. Once they go against you, especially on the down side, they can go for an eternity, 17 down days in a row for example in Japan with nary a break for a single rise. When the rise occurs, it is invariably so small that to take it is almost humiliating as it has such a small impact on the loss. The series of down Fridays and Mondays, 5 in a row in the US stock market and the series of 6 down 3:30 to closes that occurred at the height of the US meltdown were part of the Chinese Water Torture technique that the markets administered.

All one can do in such a situation is to know that this seems to be a last resort of the inquisitor, that it is almost invariably followed by the end of the sentence, and that if you can just withstand it, or be saved for example by the up opens, or up Tuesdays and Wednesdays that invariably follow such a water torture, that you have a good chance of surviving.

The other main form of torture seems to be in its most general nature, a form of compression, either in living area, food, or the muscles in the body. The screw that breaks the limbs, and the infamous French prisons where the height of the confined area is say 18 inches above a mud floor, or the constantly decreasing confined area are examples of this. We find the market analogue of this in the compressed ranges that often occur before explosive moves of a tortuous nature are due. It is hard to remember but from 4/18/06 to 5/4/06, the market experienced more than 2 weeks with the high close of 1313 not more than 1% above the low close of 1302 . Such a period relaxes the senses of danger and makes the punishment that's ready on one side or the other all the more horrible when it occurs.

Any help that my colleagues here can give me, as to torture's relation to recent and past markets, with a view to how to profit it, or at least counterthrust, things beyond the rack, the screw, or the wheel would be deeply appreciated.

J.T. Holley replies:

My studies in Existentialism while in college delved into and around this topic many times. The Surrealists and their many branches focused on a lot of man's transgressions. The author that came up more than enough was George Ryley Scott. "Cruelty is inherent in mankind" from Scott's book The History of Corporal Punishment. He also wrote The History of Torture Throughout the Ages. This later I came across while learning and studying the works of Georges Bataille. He focused daily on a set of pictures taken by French soldiers in 1905. The soldiers witnessed Ling Chi or "Death by a thousand Cuts". This was a practice of which the Chinese tied a person to a pole and proceeded to grotesquely humiliate them during and after the death process. Ryley Scott wrote of this in "History of Torture". Bataille fascination was over why the man being sliced had a smile on his face as if in ecstasy, albeit opium was commonly given as a sympathetic attempt to those enduring the slicing. Ironically, Bataille also thought of Nietzsche as the character Virgil in Dante's Inferno.

You could very easily substitute the word markets for mankind as Ryley Scott's quote would read "Cruelty is inherent in the markets". Man always seems to be driven to exert his strength and control over his fellow man. This exertion seems a lot of times to find its way in a sadistic manner with moral and legal ways following suit. The markets to me appear to be no different with man involved and the regulatory bodies trying to guide the moral and legal restraints to justify the torture and keep it from getting out of hand. Bataille and his fascination with those pictures, I can only remember my attempts at making money trading stock options and having a smile on my face as I lost over and over my money watching the statement go to zero.

P.S. The movie Hostel is a newer movie that focuses on this Underground World of Life. I don't recommend it. The first half is soft porn, second half is gory torture never before seen in the cinema. Tarantino of course was involved.

GM Nigel Davies replies:

Chess is a game in which both players attempt to inflict torture on the other. Several players, notably Bobby Fischer, have been quite explicit about the sadistic element of the game. "I like to make 'em squirm." "I like the moment when I break a man's ego." The pain may not be physical but it is pain nonetheless. But only when you play chess properly, and make it your entire existence for the duration of the game. For a few hours it is the only reality you should be aware of.

During the twists and turns of every game first one player, then the other, might hold the upper hand and torture the other. In this the psychological dynamics are very similar to markets. I don't know how it is for the rest of you, but for me one of the greatest pleasures is the feeling of release, the moment you sense the tables have been turned and your former torturer(s) are now being tortured. There's nothing quite like a short covering rally after you've been down on the trade for a few days.

Admitting these feelings exist is, in my view, a good start to controlling them. Can you take the pain or will you pay the ransom? And are you able to release your victim at the right time for the right amount of money, showing that you are a businessman rather than a monster?

There have been some chess players who could not bring themselves to win a won game because they were enjoying their 'winning position' too much. Similarly in markets I imagine there are traders and indeed fund managers who are reluctant to take a profit because this will mean releasing, or partly releasing their victim.

The fraternity of modern Grandmasters understands torture very well and the consensus is that one should avoid being taken prisoner at almost any cost. For Fischer himself this was a revelation: "The turning point in my career came with the realization that Black should play to win instead of just steering for equality." Lasker too emphasised mobility in both his writings and games, above all trying to avoid a rigid and prospectless position in which your opponent could turn the screw. This idea is reflected in the stats, defences which have counterchances score much better than the solid passive ones in which you play very correctly but allow yourself to be a prisoner of White's initiative.

What is the solution for traders? In my view it should be the same as with chess. Above all to avoid being cornered and always keep a hand or an arm free so you have a chance to escape your captor. And when doing the torturing you must be prepared to let the victim go, at the right price of course.

Stefan Jovanovich replies:

This is the best description of the weakness of the French tactical use of their Maginot Line. It also describes the successes that the Russians had after 1943 in turning the aggression of the blitzkrieg against the German attackers (Kursk being the most horrific example.)

Easan Katir replies:

Report of (a) person brought as penitent to the public auto de fe, held by the Holy Court of the Inquisition upon Sunday the 3rd day of May in the year 1579:

Orbrian, a native of Flanders, inhabitant of the city of Xeres de la Frontera, a binder by trade, in his thirtieth year. He had burnt different paintings with the picture of our Lord Jesus Christ and other saints thereon and had put his faith entirely in the teachings of Luther, considering them to be the truth. He had also ventured to teach others. He, showing great stubbornness on account of this was condemned and handed over to the arm of secular justice, so that he be burnt alive and all his good and chattels be confiscated.

One who stubbornly believes, practices and teaches market dogma may experience a similar fate. Or perhaps, don't fight the tape.

Stefan Jovanovich responds:

I apologize for being a dogmatist, but it seems to me the lesson of Orbrian, like that of Tyndall (first English translator of the Bible -- hanged, drawn and quartered for his sins), is that freedom always has its official enemies.

The "tape" exists because millions of people are free to trade. Under the Inquisition there was no such freedom. The Spanish, in spite of having the best army in the world for 200 years, lost their empire because the idea of liberty was itself considered a heresy, and the idea of a free and open market for goods and services was considered an "infidel and Jewish conspiracy".

As for torture, Napoleon is alleged to have once said about the use of bayonets that "you can do anything in the world except sit on them."

Easan Katir retorts:

One bows to your more catholic* frame of reference. My intent was less catholic, that is, inspired by the Chair, to only relate torture to markets. While Spanish ruled during those 200 years, to make profit one would align with the Spanish, and tithe to king and church, no doubt. Irrespective of one's concept of freedom, there was certainly plenty of trade going on in that age. From my same source, i read a 16th century account of a trade of 1,500 slaves for Peruvian silver, for example.

one could theorize such trade still goes on today, perhaps in milder form. When a bank buys a $10 m block of CMOs, the bank is buying the right to receive the benefit of the work of the indentured mortgage slaves, yes?

* from the Greek katholikos "universal, general"

Stefan Jovanovich answers:

The notion of "indentured mortgage slaves" is the kind of sophistry that my Alabama relatives -- and their South Carolina cousins -- used for a hundred and fifty years as an argument against abolition. It was nonsense then, and it is nonsense now. The reality of slavery is that you have no right to hold money or to learn to read and write. You have no right to contract for property subject to mortgage, and you certainly do not have the right to indenture your own labor.

The commerce of the Spanish empire from 1550-1750 was limited to those few people who held official licenses from the king. It was officially sanctioned barter, not market capitalism. The Inquisition had no tolerance for bills of exchange, letters of credit and other devilish sophistries allegedly created by Jews, Anabaptists and Lutherans (actually invented by good Italian large "C" Catholics). By outlawing the freedom to trade without official sanction the Inquisition effectively destroyed what remained of the very commercial vitality of Aragon and Catalonia that had helped create the Spanish empire. This sad history is the reason Spanish and Italian 19th century liberals were so passionate in their admiration of John Stuart Mill and their opposition to things royalist and Papist. They thought that the theocracy that Philip II created had been not the glory but the ruin of their homelands. There is very little that can be argued against that judgment.

Bruno Ombreaux replies:

I found a very interesting punishment tying up the thread on torture with the nautical thread. Keelhauling. The mild, side to side, version, is what the market imposes on offenders when it wants them to live to trade again. That's me when I am taking 10 losses in a row. I just feel... keelhauled.

The tougher, bow to stern version, is what happens to systematic traders, thousands of barnacle cuts followed by drowning.

The market knows other marine punishments. "Walking da plank", and some methods of hanging, end up in quick death, the equivalent of blowing up in a stock crash or a commodity spike.

Elliot wavists and Gannistas favor the "cat-o-nine tails" because of the mystical properties of the number 9. Caneologists prefer caning. And marooning is the ideal outcome for Jesse Livermore's admirers, because it culminates in a self-inflicted shot to the head.

Easan Katir replies:

At the risk of being too gruesome for polite dinner party conversation, one feels the need to convey a particularly extreme torture not mentioned yet in our study: In 16th century England, 105 Catholics and those convicted of treason were tortured this way:

The full sentence passed upon those convicted of High Treason was as follows : "That you be drawn on a hurdle to the place of execution where you shall be hanged by the neck and being alive cut down, your privy members shall be cut off and your bowels taken out and burned before you, your head severed from your body and your body divided into four quarters to be disposed of at the King's pleasure." The quartering part was designed as a punishment beyond death, as the common belief was that one needed a whole corpse to rise from the grave when the prevailing religious predictions came to pass.

Stefan Jovanovich responds:

As many of the list members may know, the Black and Tans successfully repressed the movement for Irish independence by adopting a less public form of terror. Very little of it is officially documented (understandably), but there are more than enough personal recollections to confirm the following: if, in a city street or a country district, there was a shot fired at a policeman or soldier, a family would be selected purely at random and evicted. The house would be left standing, along with all the furniture. If it was a farm, the neighbors would be told to care for the livestock. The family would be allowed to return when the rebel had been caught. The Israeli practice of demolishing houses has not been nearly as successful because it has been all stick and no carrot. The evicted families became willing informants precisely because in almost all cases they were not guilty. Irish nationalists found themselves being tempted to surrender their weakest - i.e. potentially disloyal - members to satisfy the British and retain popular support. But that, in turn, led all but the most fanatical to become bystanders. Why join the movement when you could be turned in by your own countrymen for an act of treason (against Ireland AND the crown) that you did not commit?

Bruno Ombreux makes a more timely reference:

There we have an analogy with the World Cup. Everybody was making fun of the French team, saying they were too old, couldn't score, wouldn't make it past the first round... Next thing they are in the Final.

The last two paragraphs of this story are from Thierry Henry:

"It was true at the beginning (of the tournament) we were not playing well but it was harsh when people said we couldn't score."

"The thing that is happening now is that we are not listening to it, to the stick. We are trying to play our game without listening to it. That's the most important thing in football."

Perhaps in trading too.

Hanny Saad replies

While I agree that concentration is a key to success in any sport as well as to trading, there is more to the story of the French's success.

Risk: yes, that four letter word again. As you all know, the French team has the oldest players in the World Cup. No one thought they would go this far judging only by their ages. In fact, it is no surprise that France got this far. Their coach Dominech said (quote) that Zidane and Henry will play all games because they are old, famous and ready for retirement (Zidane will actually retire after the World Cup), so in fact, they have nothing to lose and will take more risks than a green player who will avoid to make any naive mistake that could ruin his career. Dominech was right. They both played very well and embarrassed the Samba players more than anyone in the world cup. It seems to me that the French (contrary to the mainstream opinion) understand risk more than anyone. It's a "general" belief that the older you get the less risk you should take in markets and in life in general. How naive and sad!! I don't buy this nonsense.

Wisdom and experience: As you know, the French started very weak. They tied with Switzerland 0-0, with Korea 1-1. Yet they beat Spain, Brazil and Portugal when it really mattered. Unlike young players who are too excited to be in the world cup and being watched by millions, these guys have been there, done that. They won the cup in '98. They knew they have to save their best shot for late in their games. The end game for the trader is of supreme importance to his/ her success. It is wise to sometimes to exhaust the opponent, give him false sense of security and of your own weakness before you come up with your unexpected best shot for a nice closing.

Economy of motion: For those who are obsessed with soccer and markets the way I am, if you watched the French play, you'd notice that they don't run as much as the other teams (with the exception of Ribbery). For instance, against Portugal, their possession of the ball was remarkably lower and yet they managed to win to qualify to the Finals. They depend more on long passes with purpose. Remember, in markets, doing nothing is always a choice. If you don't have a quantifiable edge, stay out of the markets.

Economy of emotion: Here in Toronto, police officers (non French) were hoping that the French win against Portugal and are also hoping they win against Italy. The reason? If the French win, the French immigrants in Toronto will go have a nice dinner and celebrate over wine. You rarely see French celebrating their wins. The odd car with a French flag, nothing more. Most everyone else, although peaceful, block traffic for hours celebrating. The French player have the same trait after their win. If you're sitting across from a good trader, you shouldn't be able to tell if he's up or down on his trades.

Humility: Wow!! what an unusual trait for the French you say. The fact is that they actually are more humble. The German papers claimed that they will dine on the Italians like Pizza and Spaghetti prior to Germany's defeat. The Italian papers responded that the Germans should not eat Pizza and Spaghetti in the first place as their taste is not that refined and that the Italians are superior to any team on earth and may be even mars. The Brazilian striker Ronaldo claimed that he would be very surprised if he doesn't score even more goals in the World Cup after scoring the most goals in the history of the cup (he stated that prior to Brazil being ousted by France). The French newspapers on the other hand criticized the French players after their win over Portugal last night saying that if the French play this same game against "the wonderful" Italian team, they will lose in the Finals. I don't need to elaborate on the analogy to markets since every other post by the chair mentions the humble mien as a key to success in markets and in life.

David Lamb responds:

Upon engulfing the great book, Les Miserables, by Victor Hugo I came across the description of a 19th century galley, one of the most horrid houses of hell ever to be constructed. I now quote:

There was at the Chatelet de Paris a broad long cellar. This cellar was eight feet deep below the level of the Seine. It had neither windows nor ventilators, the only opening was the door; men could enter, but not air. The cellar had for a ceiling a stone arch, and for a floor, ten inches of mud. It had been paved with tiles, but, under the oozing of the waters, the pavement had rotted and broken up. Eight feet above the floor, a long massive beam crossed this vault from side to side; from this beam there hung, at intervals, chains three feet in length, and at the end of these chains there were iron collars. Men condemned to the galleys were put into this cellar until the day of their departure for Toulon. They were pushed under this timber, where each had his iron swinging in the darkness, waiting for him. The chains, those pendent arms, and the collars, those open hands, seized these wretches by the neck. They were riveted, and they were left there. The chain being too short, they could not lie down. They remained motionless in this cave, in this blackness, under this timber, almost hung, forced to monstrous exertions to reach their bread or their pitcher, the arch above their heads, the mud up to their knees, their ordure running down their legs, collapsing with fatigue, their hips and knees giving way, hanging by their hands to the chain to rest themselves, unable to sleep except standing, and awakened every moment by the strangling of the collar: some did not awake. In order to eat, they had to draw their bread, which was thrown into the mire, up the leg with the heel, within reach of the hand. How long did they continue thus? A month, two months, six months sometimes; one remained a year. It was the antechamber of the galleys. Men were put there for stealing a hare from the king. In this hell-sepulchre, they agonized, and what can be done in a hell, they sang. For where there is no more hope, song remains.

Now, the direction from the Chair, as I understood it, was to parallel types of torture with the recent (and past) market movements, and how to "profit it, or at least counterthrust". I will notate one with Hugo's galley depiction.

The Mistress is merciless to anyone and everyone who are so presumptuous as to steal her "hare" and think they can't get caught. However, some do, and some don't. Those who do get caught pay a severe price and are required to pay dearly.

In quantifying and qualifying these past many months vast amounts of particular data in the bonds futures market, I have realized many things. One thing has been the realization that counting and then weighing these certain types of variables can yield a very telling story. To me, the numbers didn't add up to being a bear market. Anomalies that were quantified and then compared with past anomalies and their ensuing movements told me that there wasn't much weight and, therefore, not much longevity to the reversal. Sporadic and inconclusive movements were constantly being experienced. Psychological bias, and its qualifications, told me that it wouldn't, and couldn't, remain for very long. Time series analysis demonstrated that minor market movements had no weight to them, whereas as the opposite could be realized with the bull side.

So, what did all this say to me? That the canes had better come out to play. Those who got caught trying to steal a hare from the king (Mistress) are now paying dearly because they didn't correctly quantify all the important variables or weigh properly the chance of stealing a hare when there was no hare to take. Of course, I have read comments on this list of those who correctly caught the brief bear move. There are always those who are able to steal the hare without being caught and, therefore, not experience the galleys of the Mistress.

I hope to never experience anything like these galley's Hugo described, nor experience (too severely) being caught trying to steal a hare from the Mistress.

Tim Hewson replies:

This torture thread makes me think of escapology, and what use does this have to getting out of tricky situations.

Wikipedia isn't hugely useful, but it does mention that a safe way to prevent someone escaping is to tie their thumbs together as their hands become redundant. Is this the same as having too tight a stop, thereby having no room to maneuver.? It also says the seasoned escapologist does everything to give himself a head start, like breathing in when being bound in order to give himself some wiggle room.

Marlowe Cassetti replies:

Market torture reminds me of the old joke of the definition of Heaven & Hell:

In heaven, the police are British,
The cooks are French,
The engineers are German
The administrators are Swiss
And the lovers Italian.

In hell, the police are German
The cooks are British
The engineers are Italian
The administrators are French
And the lovers Swiss.

Okay, what then is the definition of market torture? Wouldn't it be a place where prices are totally random without any relationship to earnings, interest rates, political events, etc? Market hell would be a place without rhyme or reason; driven by a big random number generator. Talk about ever changing cycles; counting would be useless, although I suspect that some will be quick to point out some arcane number sequence that unlocks the market's secrets. Can you imagine what the Talking Heads on CNBC would be saying as they explain about why the markets acted as they did? And the nonsense the economists would be spouting. I cannot imagine what Cramer would say; yes indeed this is the definition of torture!

James Sogi responds:

The torture inflicted by the market is different than the corporeal torture Chair describes in that it is self inflicted. The source of the pain is not external, it is internal. The mere drop of prices in itself is not painful, nor is the reduction in wealth by some percentage. The pain comes from an internal source. Without credentials in psychology, speaking from my own experience, it is a combination of fear, fear of being wrong, of being a fool, and of being seen as wrong and as a fool. It is frustration at loss of control and power. It is anger self directed at past actions and failings and personal defects. These self inflicted tortures inflict more pain and suffering than the cruelest inquisitor as no one knows the weak soft spots better than the person himself. It is odd why the market can cause such reactions. From reports, it is a general and common phenomenon. Is there anyone here who does not experience this in market operations? Why does it do what it does? What is it about market operations that cause such intense reactions? What is the best way to deal with these tortures? Central to this whole theme, it is this very pain that gives the opportunity for profit. Who is the toughest?

The pain is related to personal shortcomings. There is some dynamic with these personal weaknesses that causes such intense pain. I've seen over and over many people who refuse to see personal defects or shortcomings and place the blame elsewhere and repeat the same mistakes in order to avoid the pain. The most painful thing in the world, almost impossible, is to acknowledge one's own defects and faults. Yet that is the source of strength and progress. Change is very very difficult and without the recognition, impossible. Compounding the problem is the years and years required to accomplish the change and retrain the mind and body to alter the defects. Resolution of shortcomings and compassion for others salves the pain. The reason is not clear. The pain stems from self pre-occupation and compassion redirects the pain and converts it.

Craig Cuyler replies:

To continue the nautical theme and one involving torture, a practice called being "bent over a barrel" was a common torture administered by Barbary Pirates operating on the west coast of Africa and the Mediterranean in the 1700s. When Pirates attacked a trade or merchant ship an inevitable fight occurred where many lives were lost. The survivors of the attacked vessel were often the fiercest fighters and the most skilled, these poor wrenches were assimilated into the pirate vessels crew, where if they proved themselves they would become Pirates themselves, but the most likely fate was that they would be chained to a bench and pull oars until the day they died. They would sleep, eat, defecate on their allotted space with other captured men and their life spans were obviously very short from this point on. More interestingly if any of the attacked ship's crew were found hiding in the hold or avoiding battle they would be tied to a barrel and sodomised almost to the point of death by other slaves (kept for unsavoury tasks like this) before being thrown overboard and drowned. I don't know if the expression bent over a barrel comes from this practice but it's possible.

I would liken the hedge fund's and smaller aggressive trading operations to the Pirates of the financial world with the large banks analogous to the navy's of the countries they belong to - almost impervious to the tides, waves and the various conditions of ocean (markets). Smaller operations require larger incentives, larger risk and fiercer loyalty from their employees and must take more severe measures to keep them and punish them for disloyal behaviour. The term Vic used was "draconian". I think of the vast herds of graduates that are assimilated into the larger banks where they work as virtual "slaves" for many years before they either burn out or if they are good, get poached by the pirate operations for greater incentives and far greater risk. The ones that prove themselves here share the spoils of victory but the ones that don't have the appetite for the fight are "bent over a barrel" until they lose their jobs (tossed overboard).

Steve Leslie comments:

This concept of torture and the markets is an interesting one. To equate "Man's inhumanity to Man" or a physical abuse of the sort of torture that has been devised through the centuries and millennia and project it to the financial markets can be quite helpful and instructional provided we learn through this exercise.

Let me state first that he markets are neither good or bad, noble or ignoble, cruel or gentle -- they merely are. They exist as a vehicle to facilitate the transfer of a fungible asset such as cash and convert it to a security which will then be converted to cash again. Once that is complete then either the cash will be converted to another intangible or a tangible asset. And on and on it goes. Therefore the market in truth does not exist but in our minds. To suggest otherwise would to anthropomorphize the markets which may be cute yet would also be purely wrong. The perception of the events in our mind will be the determining factor as to whether the individual will experience pain or pleasure.

Let's look at a physical event that most of us would perceive as painful. There is a very small group of people who are true masochistic. They derive a sordid pleasure out of a literal physical beating. This can be s-xual in nature, but does not have to be. Without going into salacious detail I think the reader can imagine some events that most would consider humiliating disgusting and a host of other adjectives but to the masochist they truly experience a sordid delight through the event. Now those people are wired a certain way or have been classically conditioned to perceive this physical and/or psychological abuse as pleasurable. In fact, they will go to extreme measures to seek it out. They also will try to replicate the sensation by going deeper and taking greater and greater risks to themselves. We have read and seen some who have actually died due to a s-xual enactment or re-enactment that went way too far.

The movies have glamorized physical torture in other ways. One such example is in "First Blood" where Col. Troutman who speaks of Rambo to Sheriff Teasle as "What you consider hell, Rambo considers home."

This is where the pain or more importantly the perception of pain will exist. That is in the mind. This is the extraordinary measure that needs to be considered.

Think of it this way, if one has a nerve to an extremity severed, they will never associate pain to that body part no matter how severe or extreme the situation may be.

Let's look at financial markets. If I am long a stock and it goes up in value I am probably going to experience pleasure with this event. On the other hand, the one who took the short side may experience the pain. Why? It is not the event such as a stock going up or one going down it is the relationship to my personal situation that will be the determining factor. There are 7000 stocks and they are all constantly changing in value but only the ones that I have a financial stake in will affect me emotionally. Now if I can detach myself mentally and remain completely objective to "Vulcanize myself" like Spock then I will feel nothing when the stock goes either up or down. I will merely manage the event in an attempt to maximize my return. I will of course be a computer in a sense that feels neither pain nor pleasure. The risk is of course that unless I learn to turn off the switch so to speak I will not experience pain or pleasure in other events either.

Perhaps this is why some quants can have some of the highest returns in their performance as evidenced by Messers. Simons and others. They do not allow the emotional to interfere with the objective. Thus they focus on the statistical and their algorithms and detach themselves from the emotional aspects of financial markets. They place all of their energies on the cerebral and eliminate as much emotion as possible all in the hope of attainment of wealth. I do not know quants but in my experience with thousands of individuals is that those who's see money as nothing more than a tool for them to ply their trade with usually have the greatest success. This is why most of us are better off employing others to manage our money rather than ourselves. They may be the human equivalent of the Terminator or at least a close relative. "They feel not compassion no pain and will never stop."

Therefore, if it wealth that one seeks through financial markets I suggest one seeks out those who have already devised a pretty good mousetrap and ask them to use it for your good.

More writings by Victor Niederhoffer