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Traders and Stories

Somewhere I once quoted an observation made by Fischer Black in 1994 about the need for judging traders by their reasoning rather than results. Several people asked me about it and I recently found the paragraph, part of a longer note he wrote.

“All opportunities have stories. When prices are funny, and we can tell a good story about why they are funny, we should take big positions. But stories about trends or monetary policy are usually not good stories

When we evaluate traders, it’s crucial to judge the stories they trade on. Looking only at their profit and loss statements is a recipe for disaster.”

Maybe human beings do have an urge to put a story around everything, but everything we say is a story or an analogy (see Hofstadter’s ‘I am a Strange Loop’), even the story that we have an urge to put stories around events, so it’s unavoidable.

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