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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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