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A Quant’s Apology: Bar Humbug – The Talebian Bar-Bell Portfolio, Part I

In the end I added  this to the ‘haters’ category. Especially after I read this post. He seems to be writing anonymously. Anyone know who it is?

According to philosopher Taleb we can have heuristics, but not optimization. Optimization leads to airport delays. It also leads to cheaper tickets and in this exciting two part installment I will merely attempt to clarify, and separate, the two separate pieces of advice which have been rather successfully promulgated:

It is wise to bet on unexpected outcomes, because markets underprice them

It is wise to adopt a bar-bell portfolio eschewing a middle ground of only moderately risky investments

My hope is that those of you falling for the long-shot lure might nevertheless hear me out, because you have not considered the possibility that 2 does not follow from 1. You are fools, frankly, but I have little interest in arguing about the first belief per se, just at the moment, because nobody has been able to explain to me why Taleb’s redressing of the longshot lure does not apply to situations where it is obviously wrong (like the racetrack).

It is the implication 1 => 2 I find rather more intriguing because like most pseudo-science it sounds perfectly reasonable, almost compelling. Yet if you were assuming that the world’s foremost thinker on probability and uncertainty has thought about it carefully on your behalf, and you need not, think again. We shall pry the two beliefs apart because the benefits of long-shot betting, real or imagined, do not suggest a bar-bell strategy.

via A Quant’s Apology: Bar Humbug – The Talebian Bar-Bell Portfolio, Part I.
HatTip to Dave Lull!

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