I remember drawing a similar diagramme - the x-axis was the "agreeability of the trade" and the y "realised yield". Bottom left quadrant (disagreeable and low yielding) is eccentric crap and top-left (agreeable and low-yielding) is bubble land. The bottom-right (disagreeable and high-yielding) is where that magical alpha lives while the top-right (agreeable and high-yielding) is not sustainable in an even remotely efficient market - it quickly devolves and when overcrowded becomes a bubble (many people thinking it's disagreeable makes it agreeably disagreeable).
That we can accept and reject trades (or ideas) based on their agreeability, or dispersion of opinions, is not often considered as a metric. So long as the difference between eccentric crap and alpha is difficult to discern and costly if one goes all in on the wrong bet the uncertainty should be dealt with by diversifying across only disagreeable trades.
As a former quant trader who left a large bank and found the centre of Silicon Valley uncannily similar to the heart of Wall Street, this essay is illuminating. Wall Street is being too conservative, consigning itself to blindly jumping between mediocrity (low expected return) or bubbles (strongly negative expected return) in the top two quadrants. Just like Silicon Valley, though, at its edges it allows itself to be different. It's interesting seeing how similar mantras, based in sound financial theory, change in their aesthetics as they cross domains.
It's telling, though, that the concept of a "black swan", implying a tail event generally unforeseen by the relevant population, is met with trepidation by much of Wall Street and corporate America yet seized with zeal by a select few.
That we can accept and reject trades (or ideas) based on their agreeability, or dispersion of opinions, is not often considered as a metric. So long as the difference between eccentric crap and alpha is difficult to discern and costly if one goes all in on the wrong bet the uncertainty should be dealt with by diversifying across only disagreeable trades.
As a former quant trader who left a large bank and found the centre of Silicon Valley uncannily similar to the heart of Wall Street, this essay is illuminating. Wall Street is being too conservative, consigning itself to blindly jumping between mediocrity (low expected return) or bubbles (strongly negative expected return) in the top two quadrants. Just like Silicon Valley, though, at its edges it allows itself to be different. It's interesting seeing how similar mantras, based in sound financial theory, change in their aesthetics as they cross domains.
It's telling, though, that the concept of a "black swan", implying a tail event generally unforeseen by the relevant population, is met with trepidation by much of Wall Street and corporate America yet seized with zeal by a select few.