Knowing How to Play Poker Isn’t Enough
Today’s WSJ front page – Deutsche Bank Fallen Trader Left behind $1.8 Billion Hole. Now we have be inured to news of billion dollar losses? in the midst of Made-off, trillion dollar stimuli and Wall Street’s meltdown but.. really now. Boaz Weinstein is leaving and going to create his own hedge fund.
Mr. BW is a chess and poker whiz according to the article. So how is it that someone who is so good a figuring out probabilities got into such a mess? I am sure he is saying it was because of the unprecedented move in credit default swaps and other esoteric instruments and that excuse will be bought by untold number of investors.
The problem is, just like Brian Hunter (also formerly of DB if my memory serves me right) brought down Amaranth in 2006 with his second set of “unusual markets”.
See probabilities are not enough if you don’t also listen to your instincts and learn to tolerate the miserable feelings of being nervous or predicting that something could go wrong. That kind of Emotion Analytics would have saved Boaz …. or Brian or…..
Those who survive and thrive in these markets are those who will learn to do both. In fact, the “alpha” edge will most certainly go to those who learn the chess of the markets – which is a game about people and not about statistics.
Tags: CDO's, decision-making under risk
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Great one man. I definitly will be following your blog in the future, or at least I keep it in my RSS
So are you saying if DB hadn’t sold him out that those positions wouldn’t have taken a loss?
My take from the WSJ article is that this was a guy and group who were very well hedged from a portfolio standpoint but whose hedges no longer worked due to counterparty risk. (ie if your counterparty is going under, your swap is not going to be priced appropriately.) A lot of parties had the same problem as sellers of credit default insurance like AIG suffered credit downgrades. Boaz’ response was to get flatter and flatter; ie increase hedges but retain positions. To sit with those miserable feelings as you say. DB, whose capital he traded made a different decision and sold his group out. I guess there is some lesson to be learned here but it’s not about Boaz’ psychological trading decisions.