THE BABE RUTH EFFECT: FREQUENCY VS. MAGNITUDE
2 November 2009 by Cullen Roche
2 Comments
Excellent reading here from Credit Suisse. It’s a few years old, but still relevant. They argue that it doesn’t matter how many hands you play, but betting when the odds are in your favor:
With all that being said, most investors will not stay in a fund that shows losses 80% of the time, even if the win magnitude massively overwhelms the losses. While one may convince one’s self that it is the right thing to do(and it works for personal accounts), convincing investors is something totally different. In fact one would end up crusading against the human nature described in the paper. Case in point is the fact that Taleb has had to close two funds and is only an advisor on the latest. Most likely there is a time period beyond which people are not willing to stick with a strategy that is described in this paper. Babe Ruth hit a home run every few games – not a long time to wait, despite some strikeouts. But when catastrophe hits markets every 5-10 years, this is probably too long for most people to wait.
Brilliant article.
Gives you an insight into why most people lose in the stock markets and others never seem to put a foot wrong despite being wrong many times. Brilliant.