Jun

8

Here is the trading game used by the authors of this paper:

When a Crystal Ball Isn’t Enough to Make You Rich, by Victor Haghani and James White, of Elm Partners, September 23, 2024

The authors called the experiment “The Crystal Ball challenge.” They gave 118 young adults trained in finance $50 each and the opportunity to grow that stake by trading in the S&P 500 index and 30-year US Treasury bonds with the information on the front page of the Wall Street Journal (WSJ) one day in advance, but with stock and bond price data blacked out. The game covered 15 days, one day for each year from 2008 to 2022. In sum, the players did not do very well.

To gain further understanding, the authors invited five experienced macro traders - four men, one woman - to play the game, with markedly better results. The group of five consisted of a head of trading at a top-five US bank, a founder of top-ten macro hedge fund, a senior trader at top-ten macro fund, a former senior government bond trader at top-three US primary dealer, and a former senior Jane Street trader. These players all finished with gains. On average, they grew their starting wealth by 130%, with a median gain of 60%. All of the players were selective and highly variable in their trade sizing. These veteran traders predicted the direction of the markets significantly better than the 118 younger, less experienced participants (63% vs 51.5%), but mostly the authors ascribe the dramatically different results to the much more sensible trade sizing displayed by the experienced traders.

I played the game and got this result first (and only) time. The result is largely an accident as I wasn't paying attention to the rules or the sliders and so was taking far more risk than I realized. But maybe there is a lesson there.


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