Wednesday, April 02, 2014

From Henry Carstens and Brett Steenbarger: Markets and Life Philosophy

I've been honored to know Henry Carstens for many years--probably more than either of us care to count.  His Vertical Solutions site has a number of gems on the topic of system development, including quite a few worthwhile papers.  (The backstory is that Henry and I met through our mutual interest in the writings and insights of Victor Niederhoffer).

Today's post began as a short email from Henry to me yesterday.  I quickly expanded on Henry's idea, he expanded on mine, and pretty soon we had developed some interesting insights on markets and life.

Below is the sequence; a subsequent post will provide reflection:


Stress is the inability to find or execute an edge in life.


Stress results from challenges in finding/executing an edge in life.

Distress results from the inability to find or execute an edge in life.

Well-being results from fresh opportunities to find/execute an edge in life.

Edges in life are ever-changing.

This guarantees stress.

The inability to change/evolve guarantees distress.

Flexibility/adaptability guarantees well-being.


 Success results from finding an edge

Ever-changing edges guarantee unlimited opportunities for success

With implications for

Goal setting


What’s my edge?

Why do/don’t I have an edge

[How do I find an edge]

And from far out in left field

In relationships, work or personal, the disproportionate sharing or appreciation of edges results in stress

Having an edge means

Reducing life, or aspects of life, to non-random processes

Continuous improvement and practice can be applied to non-random processes


The most well-worn paths in life possess the least edge;

Ergo, traveling well-worn paths ensures stress and distress;

And paths that lack stress probably lack edge.



Automate or delegate an edge implementation so you can work on new edges

Combine w/ other edges to build new derivative or evolutionary edges

Automate edge creation and build an edge factory

Estimate when and how fast an edge will degrade
So here's one takeaway question from yesterday's email exchange:

How would you be leading your life differently if you were looking to maximize your edge as a person?  As a trader?


dips said...

Well...all this of course is truth just in a competitive sub-world. Which is not the only sub-world one can live in.

Market Monkey said...

This is exactly where I am in terms of thinking in my trading/life's journey!

I now think of every interaction as an opportunity to become more efficient (not effective).

I used to spend a lot of time working on becoming more effective- trying to improve on my analytical market edge when what I really needed to do is become more efficient (reducing what I call emotional variance using meditation, exercise, rest and diet).

I think it's easier to first harness our existing edges by removing/reducing inefficiency- emotional and systematic- rather than go on a hunt for more edge to compensate for our shortcomings.

Thought-provoking E-mail exchange. Thanks!


journeyman said...

Very nice sequence, thanks for sharing! Challenging question, worthy of some reflection.

David Ayer said...

Interesting riff.

The statements that caught my attention were:

"The most well-worn paths in life possess the least edge;

Ergo, traveling well-worn paths ensures stress and distress;"

I have long felt that mastery of an area and a consistent implementation of good practices constitutes a durable edge in life that prevents stress and promotes well-being.

So one example is cooking and eating healthy, good tasting food (tonight a steamed vegetable, chicken, rice, and hot Thai peanut sauce "stew"). I have been doing this for decades (a well-worn path) and it brings pleasure and health (the opposite of stress and distress).

Curtis said...

Capitalism is based on the belief of perfect competition. Under perfect competition, no one and no business should be expected to make a profit. Monopolies are illegal. Every capitalist strives to be a monopoloy. How do some companies manage to lose money every year but still their stock goes up every year? The story is one of monopoly. The belief is that they will become or possess a monopoly. Ask any business owner if they'd like more competition in their field. If most business owners are capitalist and capitalist believe in competition then most practicing capitalist have a distorted belief system.

Do Americans really belive in capitalism or do they believe in a reward system? Go to school and work real hard so that you can get a "good" easy job. Work hard today so you can retire when you get old and not have to work. Start a business and slave your life so that your kids and their kids (extensions of self) won't have to work.

Ask, how can trading be a competitive field when only the richest 1% can even trade? Can trading be as competitive as selling vegetables or fuit? Anyone can buy some vegetables and resell them. Anyone who has the capital to do "investment planning" shouldn't worry about money or investment planning, they are already in the top 1% of 1%. If you already wealtheir then 99.99% of the rest of the population and aren't happy, it is doubtful that money will make you happy.

I do not like to refer to systemic biases as "edge". Edge consititutes an absolute or at least a definite advantage in my mind. I informally sent the same questions to many system developers (including Carstens) about the proper way to develop systems. Every system developer sent back a different and contradictory answer. You might think this proved a hindrance but it proved a great insight as it taught me that system's development is craft. Understanding that system development is a craft makes it accessible to anyone and at the same times, makes it not a science even if scientific methods are used.

What is missing is epistemology of trading. Replace "edge" with "information" or "knowledge". See how that works in your examples. Epistemology is not taught. In life, it is clear you are searching for knowlege through scientific studies but scientific studies in singular can not deliver knowledge. Only through theory and many, many studies does scientific knowledge arise. There is no need to be swayed by any study or to be put any credence into any singular study. "Information" does not produce value.

Any valid bias that you can discover must be detectable which means anyone else can discover said bias which means that to have an "edge" then you must discover a bias that no one else can discover which means it must be undiscoverable which means it can't be known until the future.

Yet, ask yourself why do markets exist? Do markets really exist for investors? Investors don't need markets. Traders need markets. Markets exist to be traded.

Stress is the fundamental driver of all change. Stress can be positive or negative. No stress is unhealthy. Too much stress is unhealthy. Those who follow the beaten path follow the surest edge. This explains both why they are the most recommended and least fulfilling. The surest advantage may not prove to be the greatest advantage. In fact, it should not. The greatest trader is always the undiscovered trader.

Refocus on epistemology. This is where you may find your "edge" -- "knowledge".

Curtis said...

Think about what it means to rationalize, as a semi-vegatarian (formerly vegetarian) I have heard so many arguments that people use to rationalize their belief system.

Take for example, among wild animals, predators tend to kill the sick, old, or weak so they do a good job whereas human hunters take the strong and healthy.

First, what makes it any more right to kill the sick, old, or weak? Second, I'm pretty sure that they don't just kill the sick, old, or weak. That's not a good rationalization. A good rationalization is that wild animals don't know any better or have any alternatives but most human hunters do. All animals hunt too survive whereas most human hunters hunt for the ego trip (although some animals do kill for other reasosn). Ergo, most human hunting of animals is wrong whereas most animal hunting of animals is wrong too but the alternative would be worse.

Now take the arguments of the meat eaters which is usually "we can eat meat so that makes it right." Will it make it still be right when a superior alien intelligence comes down and kills us humans off because they can? Or the other argument, "Eating animal protein is healthy so eating meat is right.". Wrong eating protein could be healthy but killing animals could still be wrong.

Doesn't this make more sense? Eating meat can be nutrious while killing sentient animals is wrong. But, to accept this the vegetarians must accept that meat can be nutritious (against their belief system) and meat eaters must accept that killing sentient animals is wrong -- against their belief system -- even if the meat may be nutritious. How many are willing to embrace the truth? With the truth, we arrive at possible solution, namely that today's state of affairs may be temporary and solved in the future by superior technology.

As a trader, you are likely going to be faced with contradictory logic that must be resolved to move to the next higher level. Inabiltiy to accept contradictory symbosis is likely to result in frustration.

Doug A. G. said...

Haven't read all Curtis comments, but what I like most is that sentence, 'the greatest trader is always the undiscovered trader'...and the 'knowledge'...yes I think your 'edge' in the market is your 'know'...summing up...'knowLedge'...