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So what you're essentially saying (or quoting Taleb as saying) is that the stock market can only be modelled as long as most players on it - as measured by their dollars, not their noses - are ignorant of the models used.

Somehow, this strikes me as a fact that should not be surprising. After all, if the market works, and everyone has access to the same information, future value should already be incorporated into share price - so in order to do better than betting on horses, you need to be better at predicting the future value than the other players.

So, are these people betting on horses, or do they think everyone else are suckers, or have I missed something in my analysis?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 13th, 2008 at 05:54:04 PM EST
[ Parent ]
<physics>Think of it as a condensed-matter phase transition between a weakly-coupled regime and a strongly-coupled regime (or one with long-range correlations - probably strongly coupled via duality). Linear (mean-field) techniques to describe the environment of a single component of the sytem are appropriate when the back-reaction of a single element on the hole system is negligible. But in the strongly-coupled/long-range-correlated regime different kinds of techniques are needed even to describe the local environment, because of backreaction.</physics>

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Wed Feb 13th, 2008 at 06:51:33 PM EST
[ Parent ]
I'm sure that description would be very helpful if I'd had condensed-matter physics. Unfortunately, I've dabbled in x-rays and quantum computing more than condensed matter.

What I hear you saying is that they assume that stuff happening on the other side of the market is only weakly correlated with the stuff that happens to their portfolio. And that assumption turned out to be Very Wrong.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 14th, 2008 at 09:07:11 AM EST
[ Parent ]
Checking that there's a small door out of a theatre that allows you to get out at any time won't help you much when fire has started and everybody is trying to get out through that single small door...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Thu Feb 14th, 2008 at 10:39:44 AM EST
[ Parent ]
You watch the show from that doorway so you can make them all pay to get out.

Signed: Bill Gates

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 14th, 2008 at 10:53:39 AM EST
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