Archive for November, 2008

To Iterate is Human, to Recurse, Divine

November 30th, 2008
Escher's Hands

Escher's Hands

I have a fancy for functional programming languages; I find recursion intuitively elegant. However, in my mental processes, recursion seems to be a dangerous flaw.

This trade may return 5% if event A occurs-> This trade could return 10% if event A & B occur -> This trade could return 20% if event A & B & C occur -> Well, this trade has returned 20% and now people are going to pile one and it could return 30% -> … -> This trade could return 1,000,000%.

My mind selectively traverses the path on the recursive tree that is most favorable while ignoring the (huge) selection of paths that do not lead to the favorable end-node. Even worse, I forget the necessary conditions that lead to the selected outcome! A favorable outcome is pleasurable and I am a pleasure-seeking animal; It seems that this also applies abstractions.

Furthermore, the recursive thought seems to lack a terminal condition. Instead of building a balanced tree of possibilities, the favorable path gets many more steps, leading to a gross asymmetry. My mind stops traveling only after it has exhausted mental resources.

Mental recursion is dangerous without continuous checks.

* Note to the non-programmer: The title of this entry is actually an oft-repeated L. Peter Deutsch quote.

My First Perfect Trade

November 20th, 2008

By perfect trade I mean executed well and taken for the valid reasons. In yesterdays post, Liquidity Black Holes, I stated that I bought NOV SPY 83 Puts for $2.20. I sold them at the end of the today for $6.46. This was a lot of fun.

Liquidity Black Hole

November 19th, 2008

On November 13th, the SPY dropped bellow $840, and then catapulted to $900 for a monstrous gain by the days end. I believe that catapult could have been caused by, in unison, investors covering margin calls for leveraged long positions and short sellers covering as the rise grew stronger. I have very little empirical evidence of this and it is sufficiently weak to prohibit me, out of embarrassment, from posting it.

I bought NOV 83 put options on SPY earlier today at $2.20. This time around, I believe their will be A LOT of sellers and no buyers. Alternatively, if it does not fall into a liquidity black hole, I see very little upside between now and Friday close.

I used 1% of my capital on this play.

The Novelty of Women with Addiction Problems

November 17th, 2008
Amy Winehouse

Amy Winehouse

I want to comment on Halloween. (I am a bit late.)

I spent Halloween night at the NYC parade and the surrounding bars. Usually, Halloween is the night where it is socially acceptable – almost socially required — for women to dress as slutty as the temporarily relaxed local “decency” laws allow (in NYC that means one-step shy of full frontal nudity). Given that I was expecting uber-slutty, I was surprised at the very large number of girls who dressed up as Amy Winehouse . I do not care how hot you are…crack whore is not sexy.

I do not think many women have repressed fantasies about being a crack whore (at least, I hope they do not). I do think that women are very good at identifying what is, and what is not, attractive. Adopted fads are usually attractive. I think girls who wear Uggs with a Northface jacket and leggings look ridiculous (IT’S A UNIFORM!), but that does not mean I don’t find them cute. There was nothing attractive about the Amy Winehouse contagion. Women simply were aware (by word of mouth or some beacon of fashion) that other women were going to dress up as Amy Winehouse and, apparently, this costume passed some internal mental test of novelty.

Novelty apparently allowed a bad idea to bypass rational filters (e.g. do I want people to associate me with a crack whore). I think this a very common mistake; I know I make this mistake often (I mean being seduced by novelty, not dressing up as a crack whore). Novelty encourages us to throw out common sense rules. We do not know the associated outcomes of adopting (or using or whatever) something novel and we don’t seem to care. We think novel is interesting. Somehow we forget that novel can be good or bad (Yes, that flame is pretty, but I remember when I tried to touch it, it hurt).

I do not think the average trader is more sophisticated than the girls in Amy Winehouse army. They (myself included) are captivated by novelty (Whoa; CDOs are SEXY). Novelty is dangerously seductive.

On the other hand, it was Halloween, so maybe I should STFU.

Lessons Learned from Hot Girls

November 17th, 2008
XKCD #55

XKCD #55

In high school, I managed to score a date with the lovely Jess Gore.

She was far above me on the adolescent social ladder. I was the excessively introspective, semi-nerdy guy with hair that resembled hedgehog spikes (I wasn’t trying to be rebellious; I genuinely thought it looked good); She was the elegant (to the extent that you can be elegant as a teenager anyway), quietly rebellious girl without physical flaw (except for her ears which were perpetually red, but I found that oddly charming.)

Being that I had very little “game” (that’s being kind) back in high school, the entire matter was simply a consequence of a favorable situation. I was placed into a project group where she was one of the members. While working on the project, I got bored (as I am prone to do given a forced faux-intellectual venture) and suggested that we (the group) go grab food. Our other group partner was of the anal-retentive variety and opted to stay in the library to find other sources. (She deemed the suggested number of sources inadequate for our advanced 11th grade abilities.) Jess, who was apparently bored as well, chose to leave with me.

Back then, I never thought about social situations; As I said, I was excessively introspective. So when she had me bring her home first so that she could change out of her group study attire and emerged wearing something that I would describe as datish (yes — I did just say datish), I was confused.

As a consequence of my confusion, I grew progressively awkward as we moved through what I began to view as a date. (In retrospect, it definitely was a date. Or at least, I’d prefer to pretend it was.) This opportunity was unprecedented in my testosterone-dominated mind and I did not want to risk making a mistake. To prevent such a loss, I added (too many) judgemental filters to my behavior and my mind was not able to effectively cope with the stress. (It still is incapable of doing this but, thankfully, I have very few behavioral filters anymore.)

Censoring your actions and behavior makes you look filled with self-doubt. Confidence is ridiculously sexy; Self-doubt is not. She clearly could see that I was not acting like myself. The social instincts of women are superior to men; We are insects by comparison. She grew visibly less interested. Thus, I missed what would have been a very large opportunity at the time.

What is the point of this story? My mind has irrational artifacts. To this day, I am incredibly awkward around Jess, even though she does not in any way intimidate me. (I am for the most part socially arrogant; Almost no one intimidates me anymore.) This pattern also holds — albeit to a lesser degree — for other girls that I idolized in high school. It seems that my perceptions are layered; The old socially jittery version of myself still exists and somehow has pre-emptive rights to my actions. I can recognize when I am acting this way but, ironically, it requires effort to be myself!

If this is true, than the layers bellow high school horny also play a role in my decisions. This is probably a convoluted way to think about fear and greed, but it helps me. I still cannot hold a five-minute conversation with Jess Gore because of some old irrational mental fragments. Therefore, I try to recognize that the attractiveness of a trade may be due a lot more to irrational (in the context of trading) mental processes than the brilliance (har har) of my analysis.

…I suppose I am still a bit excessively introspective.