15 thoughts on “Martingales”

1. I’ve often wondered about this strategy but never knew it was called martingale.
   Has anybody ever tried it on No 5 at Randwick, or
   that well known AFL team, The Roosters.

2. Good to see you are catching up Mr Quiggin, yes its true as ive stated many times, the financial models used (Backed by noble prize winning economists don’t you know?) are at the heart of this mess, along with the pols using state sponsored market intervention to build their mad political pork barrel politics empire.

   I can sole both of these problems with ease, With a simple golden rule.

   If you are too big to fail, you are too big to regulate. If you are not too big to fail then you don’t need regulating.

   *news just in, it seems that the bailout of the hill and the street, has within it, provision giving the chairman of the Securities and Exchange Commission “the authority to suspend mark-to-market accounting and requires the agency to complete a study on the effectiveness of this accounting method.”

3. As they say, the market can stay irrational longer than you can stay solvent – thats why they always win

4. Do I understand you to be saying by your “simple golden rule”, Sean that, “small is beautiful”?

   So how would that work, given a hypothetical market tendency toward oligopoly? Or do you suggest that markets do not work toward a Darwinian species death to the non-efficient, or non-effective players?

   Since scale is going to be a factor at work here, are we talking about local markets, national markets, or global markets?

5. correct me if i am wrong sean,

   but your rule offers nothing of value to anyone

6. As Mr Taleb points out, banks should be like restaurants, they come and go but general quality of food goes up.

   So yes lots of smaller banks with smaller risks, as we have seen with the Quango banks Mae and mac, banking is something the state should not get involved in other than set the rules of the game.

7. This is interesting stuff. Jordan Ellenberg’s article demonstrates some similarities between the financial crisis and the martingale betting strategy, related to how they concentrate risk. It would be interesting to try to flesh out these ideas and make them more precise.

   It is worth noting that the word ‘martingale’ also refers to a subject used in probability theory, which is used to analyse the martingale betting strategy, but is much more general. A martingale is a type of sequence of random variables (a stochastic process), and I have no doubt that sequences of random variables play an important role in the analysis of financial markets. It sounds like something interesting to do with stochastic processes and risk is going on.

8. “It sounds like something interesting to do with stochastic processes and risk is going on.”

   I think economists should leave this stuff well alone they have already caused mayhem with it, drafting in the psychologists would be a better bet (pardon the pun)

   “I have no doubt that sequences of random variables play an important role in the analysis of financial markets.”

   ROFL, lets see, the pols want risky mortgages as a political good, the masters of the universe have a financial model that they claim eliminates risk, talk about a meeting of minds! So Fannie and freedie start the ball rolling bundling “state backed” bonds at inflated prices into the market place, yippee shout wall street as the dot com boom busts, something else to get our teeth into, and the derivatives flow.”get the Chinese on the phone i have deal for them” (now try to put all that in Greek letters? no wonder the academics balk at the obvious)

   Here is a tip, the future is unknowable we can only guess.

9. Sean, Please provide references to substantiate your claim that there are financial models which claim to “eliminate risk”.

10. Sean, psychology is obviously important but this does not insubstantiate probability and statistics.

11. 9,10

    Bit busy today so you can read this on the subject

    http://rs.resalliance.org/2008/09/17/financial-resilience-taleb-and-mandelbrot-reflect-on-crisis/

    I think this is at the heart of the Tarp plan, th other option which still might have to be done is the debt for equity swop, Paulsons gambit is that the Toxic debt is more than toxic, its cancer.

    As the printing presses get ready to roll of our fiat currency and inflate us away to a different problem, pause for thought that we cannot print Trust.

12. Re #11. Sean, you have not substantiated your claim that “financial models eliminates risk”. To the best of my knowledge, there is no such model which claims to eliminate risk. Furthermore, non-linear models (tangentially mentioned in your link) have been applied to examine Minsky’s financial instability hypothesis. For example, Steven Keen’s PhD thesis from many years ago.

    So, I agree with Peter Wood, although I have yet to see how psychology can help in financial crises except possibly to help individuals adjust to their changed wealth conditions. I’d like to see how psychology is applied to convince people that managerial (private and public) ‘spin’ is not a good idea.

    Regards

13. And securitization isnt a vast shell game? it certainly is not a zero sum game as the taxpayer has found out. I think the real world has laid bear the claims that spreading the risk allowed higher multiples to be borrowed? As too the move from the finance-funding-procurement model to money market, this we were told as it never failed in the past should not fail in the future. ooops?

    BTW in, eliminate risk, I did not mean all risk. We know from experience that the less risk you perceive the more risks you take, and the cumulative effect of these new models or Alchemy if you accept my POV is yet more risks were taken.

    No disrespect, economics is nothing more than a secular religion, It certainly is not a science. But what would an engineer like me know?

14. Re #13 and #8. A self identified engineer recommends economists to discard quantitative methods and turn to psychology because, he says, economics is a secular religion. Hm

15. Thanks for the link Sean. It may be worth mentioning that I don’t think the random variables involved with financial markets are likely to be normally distributed.