Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
One thing I wondered about after reading this article is my own "utility function". Looking at my own investment behavior, I don't think I behave as if a 10% loss is twice as painful as a 10% gain. And I think this also applies to most of the famous value investors (e.g. Buffett, Munger, Graham, Whitman).

One of the assumptions that I knock heads with all the time in my work in survival analysis is what we call the "triple i" assumption: independence of fates and identity of rates among individuals. Contagion is rampant in markets, so independent behavior among participating individuals is almost certainly moot. But so too is the idea of identity of rates. Every individual has a slightly different time horizon, required return on capital, and likely a different underlying behavioral "risk/utility function."

None of this precludes attempting to model the underlying system, but it becomes much more of a bitch. And there is the ability in such a system for real inherent ability to outperform (or underperform) the system to masquerade as random variation, and indeed be undetectable as anything other than random luck.

Yak, yak, yak, yak.

Thanks for posting the link. solasis is right. I really need to read Taleb's book.

Todd
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.