Friday, August 25, 2006

Strategy versus execution schizophrenia

By nature I am a strategy guy. I spend my time thinking about the future mostly because I a really do believe that "only the paranoid survive" (http://www.amazon.com/gp/product/0385483821/104-5435827-2375938?v=glance&n=283155) yet I have worked long enough to understand that really execution is king. I still find this reality very difficult because "going analytical" is a bit like swimming underwater: when you get back the the surface you realize that you have been away for some time and things may have changed without you noticing. This is where I find the magic of time management does the job: have regular meetings to allow you to monitor and interact with the execution and leave the rest of the time for strategic free thinking.

Tuesday, August 22, 2006

A little noise to nudge people into taking risk

http://books.global-investor.com/books/23007.htm?ginPtrCode=10202&identifier=bbd1b3537d09ae2e36b5010dd505b3ec

I listened to Aaron Brown present his idea that for an exchange to be efficient the deals need to be incentivised with a chance of large payouts. This makes sense to me, what is more motivating: Getting the average every times or getting a random return but with the chance of a high value? I think human nature cannot accept the hard reality of what an average return implies and naturally will search for risk in order to give him a chance for a better return.

Algorithmic trading

http://www.theregister.co.uk/2006/08/21/computer_generated_financial_markets/

It is interesting that some trading models are "built-up" from domain specific ideas, a bit like in physics, while other models a created out of data with little domain specific knowledge. Google now translates text with algorithms that have learned only from existing text and have a very abstract notion of similarity in sequence of words. Likewise, people use neural networks in financial models. With these models it is often not easy or even possible to explain "how" a result was found. When decisions need to made in milliseconds it is not possible to double check with humans before an action is taken. The game is then to make more money than to lose it while not even really understanding the why of the actions taken.