"And the dilettante who “trades for fun” will be eaten alive by a firm with a much better model of a) the world and b) the dilettante themself."
This is maybe true in a zero-sum game such as commodity futures markets, but not necessarily true in what can be a positive (or negative) sum game such as stock markets. The amateur may generate less return than a professional, but often not, once the professional's fees are taken into account.
Then again, the number of professionals who underperform index funds is remarkable.
> I’m reminded of the story of Richard Feynman in academia6. His colleagues who kept their office doors closed made progress on their research in the short-term, but hit stumbling blocks. Those who kept their doors open didn’t seem to make much progress initially, but eventually outpaced the “closed door” scientists. They had new ideas and research directions based on all the interesting conversations they were having with others.
> The Efficient Market Hypothesis is one of the core concepts taught in Finance 101. The Efficient Market Hypothesis is a lie. The person that better understands the nature of a small sliver of the world (e.g. Apple’s share price) will make more money than others.
... and in the process they'll bring the market closer to a perfectly efficient one.
This is a pretty small nitpick, but I feel like this is one of several "takedowns" I've seen of the EHM which seems like it's only really 'refuting' the absolute strongest form of the principal - a sort of "Perfectly Efficient Market Hypothesis" - which I'm not sure anyone really believes, while actually affirming the general concept behind the hypothesis.
The EMH isn't an absolute rule, but it just seems like basic sense, in line with the rest of the advice here: if you think you've got some killer trade that's going to make you a ton of money, it's possible you're right, but it's also very likely that the market's price accounts for something you aren't pricing in yourself.
In my view it's not a ironclad "you can never make a winning trade", but it's an important reminder towards humility and I think deserves better than to be called (literally) a bold-faced lie.
I don't get it, is this painting the American 30-year mortgage as a bad deal for the buyer? I've always thought of it as a subsidy, after all isn't that Freddie Mac & Fannie Mae whole deal: taking the side of the bet that nobody would?
All this book demonstrates is that trading is a wasteful economic activity.
The derivative nature of modern trading makes it a useless economic activity. Modern trading is almost entirely based on trying to read the actions of other actors within the market rather than trying to discover something that is True, no matter what anyone believes, about the world.
If the point of our capital market was truly to efficiently allocate capital, we would pass a law requiring all trades be made public in real time. People who have discovered a true piece of information that confers advantage don’t need to keep that information secret to profit.
> Why did I write this book review? To test my intellectual mettle. I could easily have posted this book review elsewhere, but no, I wanted to see how I stack up against other ACX Book Review contest participants.
Well, you had a bit of edge here in getting your review published. It's true these are people using their belief in rationality to literally pay rent, but it's also not an unfamiliar relationship.
SSC and LessWrong have been a frequent topic of conversation at Jane Street for a long time, going back to the late oughts. Eliezer Yudkowsky and Robin Hanson gave a talk there on AI safety in 2011(?)
Jane Street even used to advertise on SSC.
This is all to say, good going (The book review is also excellent!)
To be fair,Jane Street probably didn't learn their rational approach to risk management from SSC/LW. That likely came from one of the founders' stints on a nuclear submarine. In fact, an earlier book review in the series had some familiar ideas in it as well: https://astralcodexten.substack.com/p/your-book-review-safe-enough
> The Efficient Market Hypothesis is a lie. The person that better understands the nature of a small sliver of the world (e.g. Apple’s share price) will make more money than others.
> Modern financial markets are exceedingly competitive. This means that the bigger you think your edge is, the more likely it is that you’re wrong.
...isn't that a statement of (a form of) the efficient market hypothesis?
> Lebron views trading as an act of creativity, a way to make the world, in one small way, a better place through creating efficiencies in markets.
I'm curious to hear other takes... but to me, this feels like the epitome of motivated reasoning.
Yes, market efficiency is a *good thing* for the obvious reasons. But there's opportunity cost to so much effort to eke out gains for the benefit of so few, there's economic risk introduced by the exposure to cascading strategy failures, there's direct harm caused by encouraging poor investments, and (perhaps worst of all) there's a reinforcement of *money* being the best measure of status. I find it hard to believe Lebron's view is not net-negative to society.
Taking a myopic view, sure, I can understand how getting into trading is a reasonable, and even good choice for someone to make. But it seems *so* wrong to me to use that view to make statements about what's good for the world. There's a better equilibrium society could enjoy: let's call that good instead.
"When the share price is down is when layoffs happen."
This sounds plausible as a rule of thumb, but right now I mostly see the opposite. This year, practically all of the largest tech companies have had major layoffs, and most of them have hit new all-time highs for their stock price.
Sounds like an interesting book, sort of a financial-trading-themed "11 Rules for Life". I do notice how it sort of transitions from "discovering truths about the world that no one else knows" though "the importance of modeling people and what they know" into "the nobility of agonas and the purifying flames of competition". Which is actually one of the things I dislike about financial trading - it feels like a hideously inefficient protocol that's laid waste to the best minds of the last few generations. Kind of like proof-of-work, but running on human ambition rather than GPUs. But I suppose money is a form of power, and allocation of power is an important problem, and it's not like there's ever been a shortage of people competing to drain off tiny bits of power for themselves by doing services for people with power.
I rather like the review's style. Efficient, concise, and still showing signs of a personality underneath. I do get the impression that the reviewer has an axe to grind with the vague rationalist/EA/ACX community, but it seems like a small axe, more of a hatchet, really.
I believe that this book is a good, insightful description of how financial trading works. I'm a bit more skeptical about the applications to non-trading life. It made me think of this comedy clip:
The comedian watches the Chris Voss Masterclass in being a negotiator, and comes to the conclusion that it's less a class than a documentary about a madman who treats ordinary interactions with service workers like a hostage negotiation...
” This seems to be why there is little innovation in government: talented engineers are treated as second-class citizens in research labs, so they work for Stripe and OpenAI instead. Similarly, one can attribute the lack of innovation in hospitals to doctors holding all of the institutional power. Often, all a hospital needs to save lives is simple practices that other businesses figured out long ago, but the hubris of MDs prevents this from happening. ”
I don’t understand this part. It starts off talking about government and then immediately mentions ”research labs” which suggests that the meaning is that no one ever invented anything in a government run research facility, which isn’t true (and which isn’t ”government” anyway). Also, doctors don’t hold all of the institutional power in hospitals. No one is prevented from coming up with an idea for an innovative hospital and suggesting that if they like.
> Lebron argues that we need stories here. Edge is expressed in stories: an edge does not exist without a clear mental representation of that edge. Pure linear algebra does not suffice.
My model is that Rentech & friends *are* what makes this true. If your edge is just linear algebra, Simons and his quant army figured it out years ago, and you need a compelling non-mathematical story to overcome this barrier.
> Similarly, one can attribute the lack of innovation in hospitals to doctors holding all of the institutional power. Often, all a hospital needs to save lives is simple practices that other businesses figured out long ago, but the hubris of MDs prevents this from happening.
Doctors often hold much less institutional power than the author thinks… the doctors I know often feel tightly constrained by government and business interests, whose collective decisions are made primarily by individuals without medical training.
I am compelled to comment on the really excellent execution of this review. You can feel how the reviewer strives to communicate the main points of the book, through the lens of what the ACX audience would appreciate. They do so briskly and concisely, which avoids the length problems some other reviews in the contest have had. They interject a few personal asides and connections to related subjects, but not in a way that distracts or takes over the review. They give clear real-world examples of each concept.
Overall, I'm left with the feeling that the review itself is "dense" in meaning. I think I would derive a lot of value from closely reading each section and paragraph, considering their implications and how they relate to my own life. That's an impressive feat for a book review.
Other book reviews we've seen so far might be more entertaining, or their topics more interesting. But I'm currently feeling like I have to give this one a top vote based on the strength of execution. I'd love to see more reviews written like this.
I have invested almost exclusively in hedge funds and CTAs for roughly thirty years now and I have found your review really very interesting, clear and relevant.
I am going to read the book and I am going to forward your review to all the money in managers in my portfolio.
The apprenticeship analogy is fantastic. Well, actually it’s not really even an analogy. I recently started at a fund and am effectively an apprentice. I’m doing the infrastructure and learning. Eventually I will do the infrastructure + analysis. Then analysis + decision making. Then mostly decision making
Interesting how this review makes me uncomfortable, and unwilling to ever participate in market trading or try to apply market-based reasoning to my life. I hate competing with anyone over anything, and I just want to remain in my comfort zone and do things I know and like.
> The Efficient Market Hypothesis is one of the core concepts taught in Finance 101. The Efficient Market Hypothesis is a lie. The person that better understands the nature of a small sliver of the world (e.g. Apple’s share price) will make more money than others.
> Modern financial markets are exceedingly competitive. This means that the bigger you think your edge is, the more likely it is that you’re wrong.
> “Evolutionary thinking applies quite directly when thinking about the evolution of markets. Having an edge in a mature market means understanding the world better than other traders, even ones who are already highly skilled. In fact, the marginal trader in modern financial markets is quite sophisticated and skilled indeed.”
This section is quite confusing to me, as this is basically what an economics professor teaching Finance 101 to econ majors will say when describing the EMH. There might theoretically be inefficiencies you could exploit, it's just that if you think you found one, it's far more likely that you are mistaken (often for the exact reasons described immediately after this section) than that you are correct. (To be precise, it's not just about having an edge--the edge has to be big enough to give you a better percent return compared to what you have to invest, and it has to compensate for any additional risk, in order to "violate" EMH).
Later, it even says this:
> If you think your costs are negligible relative to your edge, you’re wrong about at least one of them.
Which again seems to capture the spirit of the EMH (arguably even the strong form if taken literally, although this whole review seems to be written as if cheating is not an option, so we'll say the semi-strong form) as commonly expressed.
Re:the last bit, academic research is also a genuine apprenticeship, and which was one of my favorite parts of it (though the flipside is this is also why bad advisors are so damaging)
>“Residential real estate has historically returned significantly below equity markets over long time horizons”
Sure, but if I got to the bank to get a 300k loan for a house, I'll get it at a very low interest rate (at least until this year), considerably below inflation. If I got and ask for a 300k loan to leverage myself into buying ETF, I kinda expect to be laughed out of the office.
"And the dilettante who “trades for fun” will be eaten alive by a firm with a much better model of a) the world and b) the dilettante themself."
This is maybe true in a zero-sum game such as commodity futures markets, but not necessarily true in what can be a positive (or negative) sum game such as stock markets. The amateur may generate less return than a professional, but often not, once the professional's fees are taken into account.
Then again, the number of professionals who underperform index funds is remarkable.
Great review. I'm going to buy the book.
I have to admit that every time i read Lebron, I thought of LeBron.
This was such a good book.
You all may enjoy my interview of the author: https://www.dwarkeshpatel.com/p/agustin-lebron
> I’m reminded of the story of Richard Feynman in academia6. His colleagues who kept their office doors closed made progress on their research in the short-term, but hit stumbling blocks. Those who kept their doors open didn’t seem to make much progress initially, but eventually outpaced the “closed door” scientists. They had new ideas and research directions based on all the interesting conversations they were having with others.
You are thinking of Richard Hamming: https://gwern.net/doc/science/1986-hamming#open-door-policy
For those wondering, the Bayesian cite is "Bayesian estimation and the Kalman filter" https://core.ac.uk/download/pdf/82197354.pdf
> The Efficient Market Hypothesis is one of the core concepts taught in Finance 101. The Efficient Market Hypothesis is a lie. The person that better understands the nature of a small sliver of the world (e.g. Apple’s share price) will make more money than others.
... and in the process they'll bring the market closer to a perfectly efficient one.
This is a pretty small nitpick, but I feel like this is one of several "takedowns" I've seen of the EHM which seems like it's only really 'refuting' the absolute strongest form of the principal - a sort of "Perfectly Efficient Market Hypothesis" - which I'm not sure anyone really believes, while actually affirming the general concept behind the hypothesis.
The EMH isn't an absolute rule, but it just seems like basic sense, in line with the rest of the advice here: if you think you've got some killer trade that's going to make you a ton of money, it's possible you're right, but it's also very likely that the market's price accounts for something you aren't pricing in yourself.
In my view it's not a ironclad "you can never make a winning trade", but it's an important reminder towards humility and I think deserves better than to be called (literally) a bold-faced lie.
>No luck finding this story via Google or ChatGPT, but I think I’m getting the details broadly correct.
Because it wasn't Feynman, it was Hamming. See, "You and your research"
(edit: scooped by Gwern)
Isn't the GameStop thing kinda fake? They weren't out to stop the masses revolting, they just ran out of money to fund T+2 or something
I don't get it, is this painting the American 30-year mortgage as a bad deal for the buyer? I've always thought of it as a subsidy, after all isn't that Freddie Mac & Fannie Mae whole deal: taking the side of the bet that nobody would?
All this book demonstrates is that trading is a wasteful economic activity.
The derivative nature of modern trading makes it a useless economic activity. Modern trading is almost entirely based on trying to read the actions of other actors within the market rather than trying to discover something that is True, no matter what anyone believes, about the world.
If the point of our capital market was truly to efficiently allocate capital, we would pass a law requiring all trades be made public in real time. People who have discovered a true piece of information that confers advantage don’t need to keep that information secret to profit.
> Why did I write this book review? To test my intellectual mettle. I could easily have posted this book review elsewhere, but no, I wanted to see how I stack up against other ACX Book Review contest participants.
Well, you had a bit of edge here in getting your review published. It's true these are people using their belief in rationality to literally pay rent, but it's also not an unfamiliar relationship.
SSC and LessWrong have been a frequent topic of conversation at Jane Street for a long time, going back to the late oughts. Eliezer Yudkowsky and Robin Hanson gave a talk there on AI safety in 2011(?)
Jane Street even used to advertise on SSC.
This is all to say, good going (The book review is also excellent!)
To be fair,Jane Street probably didn't learn their rational approach to risk management from SSC/LW. That likely came from one of the founders' stints on a nuclear submarine. In fact, an earlier book review in the series had some familiar ideas in it as well: https://astralcodexten.substack.com/p/your-book-review-safe-enough
> The Efficient Market Hypothesis is a lie. The person that better understands the nature of a small sliver of the world (e.g. Apple’s share price) will make more money than others.
> Modern financial markets are exceedingly competitive. This means that the bigger you think your edge is, the more likely it is that you’re wrong.
...isn't that a statement of (a form of) the efficient market hypothesis?
> Lebron views trading as an act of creativity, a way to make the world, in one small way, a better place through creating efficiencies in markets.
I'm curious to hear other takes... but to me, this feels like the epitome of motivated reasoning.
Yes, market efficiency is a *good thing* for the obvious reasons. But there's opportunity cost to so much effort to eke out gains for the benefit of so few, there's economic risk introduced by the exposure to cascading strategy failures, there's direct harm caused by encouraging poor investments, and (perhaps worst of all) there's a reinforcement of *money* being the best measure of status. I find it hard to believe Lebron's view is not net-negative to society.
Taking a myopic view, sure, I can understand how getting into trading is a reasonable, and even good choice for someone to make. But it seems *so* wrong to me to use that view to make statements about what's good for the world. There's a better equilibrium society could enjoy: let's call that good instead.
"When the share price is down is when layoffs happen."
This sounds plausible as a rule of thumb, but right now I mostly see the opposite. This year, practically all of the largest tech companies have had major layoffs, and most of them have hit new all-time highs for their stock price.
Sounds like an interesting book, sort of a financial-trading-themed "11 Rules for Life". I do notice how it sort of transitions from "discovering truths about the world that no one else knows" though "the importance of modeling people and what they know" into "the nobility of agonas and the purifying flames of competition". Which is actually one of the things I dislike about financial trading - it feels like a hideously inefficient protocol that's laid waste to the best minds of the last few generations. Kind of like proof-of-work, but running on human ambition rather than GPUs. But I suppose money is a form of power, and allocation of power is an important problem, and it's not like there's ever been a shortage of people competing to drain off tiny bits of power for themselves by doing services for people with power.
I rather like the review's style. Efficient, concise, and still showing signs of a personality underneath. I do get the impression that the reviewer has an axe to grind with the vague rationalist/EA/ACX community, but it seems like a small axe, more of a hatchet, really.
I believe that this book is a good, insightful description of how financial trading works. I'm a bit more skeptical about the applications to non-trading life. It made me think of this comedy clip:
https://www.youtube.com/watch?v=AwueQ-Mbdb8
The comedian watches the Chris Voss Masterclass in being a negotiator, and comes to the conclusion that it's less a class than a documentary about a madman who treats ordinary interactions with service workers like a hostage negotiation...
Desinit in piscem mulier formosa superne.
” This seems to be why there is little innovation in government: talented engineers are treated as second-class citizens in research labs, so they work for Stripe and OpenAI instead. Similarly, one can attribute the lack of innovation in hospitals to doctors holding all of the institutional power. Often, all a hospital needs to save lives is simple practices that other businesses figured out long ago, but the hubris of MDs prevents this from happening. ”
I don’t understand this part. It starts off talking about government and then immediately mentions ”research labs” which suggests that the meaning is that no one ever invented anything in a government run research facility, which isn’t true (and which isn’t ”government” anyway). Also, doctors don’t hold all of the institutional power in hospitals. No one is prevented from coming up with an idea for an innovative hospital and suggesting that if they like.
Are all people named Lebron competitive?
> Lebron argues that we need stories here. Edge is expressed in stories: an edge does not exist without a clear mental representation of that edge. Pure linear algebra does not suffice.
My model is that Rentech & friends *are* what makes this true. If your edge is just linear algebra, Simons and his quant army figured it out years ago, and you need a compelling non-mathematical story to overcome this barrier.
> Similarly, one can attribute the lack of innovation in hospitals to doctors holding all of the institutional power. Often, all a hospital needs to save lives is simple practices that other businesses figured out long ago, but the hubris of MDs prevents this from happening.
Doctors often hold much less institutional power than the author thinks… the doctors I know often feel tightly constrained by government and business interests, whose collective decisions are made primarily by individuals without medical training.
I am compelled to comment on the really excellent execution of this review. You can feel how the reviewer strives to communicate the main points of the book, through the lens of what the ACX audience would appreciate. They do so briskly and concisely, which avoids the length problems some other reviews in the contest have had. They interject a few personal asides and connections to related subjects, but not in a way that distracts or takes over the review. They give clear real-world examples of each concept.
Overall, I'm left with the feeling that the review itself is "dense" in meaning. I think I would derive a lot of value from closely reading each section and paragraph, considering their implications and how they relate to my own life. That's an impressive feat for a book review.
Other book reviews we've seen so far might be more entertaining, or their topics more interesting. But I'm currently feeling like I have to give this one a top vote based on the strength of execution. I'd love to see more reviews written like this.
I have invested almost exclusively in hedge funds and CTAs for roughly thirty years now and I have found your review really very interesting, clear and relevant.
I am going to read the book and I am going to forward your review to all the money in managers in my portfolio.
Hello, I am a long time investor specialized in hedge funds and CTA.
I found the Laws of trading book review really very, very interesting, clear and relevant.
I am going to buy the book and I am going to forward the review to all the hedge fund managers I have in my portfolio.
My congratulations to the reviewer.
> but the hubris of MDs prevents this from happening
This is one of those “if everyone would just...” drive by statements.
Everyone will not just. Your brilliant idea is not so brilliant if you can’t figure out how to accommodate human nature.
The apprenticeship analogy is fantastic. Well, actually it’s not really even an analogy. I recently started at a fund and am effectively an apprentice. I’m doing the infrastructure and learning. Eventually I will do the infrastructure + analysis. Then analysis + decision making. Then mostly decision making
Interesting how this review makes me uncomfortable, and unwilling to ever participate in market trading or try to apply market-based reasoning to my life. I hate competing with anyone over anything, and I just want to remain in my comfort zone and do things I know and like.
> The Efficient Market Hypothesis is one of the core concepts taught in Finance 101. The Efficient Market Hypothesis is a lie. The person that better understands the nature of a small sliver of the world (e.g. Apple’s share price) will make more money than others.
> Modern financial markets are exceedingly competitive. This means that the bigger you think your edge is, the more likely it is that you’re wrong.
> “Evolutionary thinking applies quite directly when thinking about the evolution of markets. Having an edge in a mature market means understanding the world better than other traders, even ones who are already highly skilled. In fact, the marginal trader in modern financial markets is quite sophisticated and skilled indeed.”
This section is quite confusing to me, as this is basically what an economics professor teaching Finance 101 to econ majors will say when describing the EMH. There might theoretically be inefficiencies you could exploit, it's just that if you think you found one, it's far more likely that you are mistaken (often for the exact reasons described immediately after this section) than that you are correct. (To be precise, it's not just about having an edge--the edge has to be big enough to give you a better percent return compared to what you have to invest, and it has to compensate for any additional risk, in order to "violate" EMH).
Later, it even says this:
> If you think your costs are negligible relative to your edge, you’re wrong about at least one of them.
Which again seems to capture the spirit of the EMH (arguably even the strong form if taken literally, although this whole review seems to be written as if cheating is not an option, so we'll say the semi-strong form) as commonly expressed.
Re:the last bit, academic research is also a genuine apprenticeship, and which was one of my favorite parts of it (though the flipside is this is also why bad advisors are so damaging)
The audiobook of Laws of Trading is currently free for Audible members.
>“Residential real estate has historically returned significantly below equity markets over long time horizons”
Sure, but if I got to the bank to get a 300k loan for a house, I'll get it at a very low interest rate (at least until this year), considerably below inflation. If I got and ask for a 300k loan to leverage myself into buying ETF, I kinda expect to be laughed out of the office.
"The markets are a very scary place, and you are in an existential arms race with your competitors."
I read "scalpy" and only when re-reading that paragraph I noticed. Seems even more fitting.