resilience, not stability

The Chicago Pit on Negatively Skewed Bets

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The Chicago pit has a saying that captures exactly the perils of entering into a negatively skewed bet:

“Traders who sell volatility eat like chickens and shit like elephants.”

Taleb has shown that negatively skewed bets are tempting enough even when we’re risking our own capital. The moral hazard problem and the resultant cheap leverage makes the trade a no-brainer for a bank.

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Written by Ashwin Parameswaran

December 16th, 2009 at 5:20 pm

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