Risk & Chance

Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:

Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss.  One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number.  Another is to concentrate and exert effort when tossing.  These behaviours are quite rational if one believes that the game is a game of skill. 

As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.  

De Charms(1968) stated that “Man’s primary propensity is to  be effective in producing changes in his environment.  Man strives to be a causal agent, to be the primary locus of causation for, or the origin of, his behaviour; he strives for personal causation.

The polar opposite of mastery is helplessness.

In the markets, those with an ‘edge’ over the market can be thought of as masters, while those who don’t believe in outperformance of the averages can be thought of as helpless. Of course, in this case the helpless are not truly helpless; they may accept they have no influence on the outcome but provided they accept the proven long-term upward drift of the market, they can choose the path of the low-cost index fund, saving time and money against the perceived masters (on average, the indices outperform).  This doesn’t apply to the foreign exchange market.

Lefcourt (1973)… concluded that “the sense of control, the illusion that one can exercise personal choice, has a definite and positive role in sustaining life.” Thus, people show a preference for controllable over uncontrollable events.The distinction between skill and chance situations is further complicated by the fact that positive outcomes are most often attributed to the actions that precede them.

Think of many of the individuals who have made big gains in the housing market, founders of certain successful businesses, and some flavour-of-the-month fund managers. Positive results, especially those associated with a large monetary gain, often imbue individuals with a false sense of superiority and foresight, or even control, over events that are actually largely outside of their control.  


5 responses to “Risk & Chance

  1. I appreciate very much your resourceful comments. Today’s post about one’s false sense of control, in particular, is a very timely reminder for me. Thanks and good luck!


  2. So true. I too wish I knew what part of my trading is skill verses Luck. The old saying “It is better to be lucky then smart” is quite true. But I also think that you make your own luck and being prepared sure helps you to be lucky.

  3. Hi Banker, when it comes to trading, I think the phrase needs to be qualified to an extent to account for the passage of time. In my opinion, at least, I would only rather be lucky than smart if this luck lasted for as long as I continued trading. Otherwise, I think a burst of luck can be dangerous and I would choose to be smart. Still, while I don’t like luck in trading there is no getting away from it’s presence, so I try to acknowledge its role.

    Also, it’s an interesting point about making your own luck. This definitely seems to be the case in sports, for example, but I wonder how much perceived luck is really just the by-product of hard work (being skilled/smart). Golf player Lee Trevino once said something along the lines of ‘the more I practice, the luckier I get.’

  4. Totally agreed on the Lee Trevino comment. That is what I was trying to get to. Work hard, be prepared and “breaks” (for lack of a better word) seem to come your way.

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