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LukeDing comments on Inadequacy and Modesty - Effective Altruism Forum

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Comment author: LukeDing 29 October 2017 10:23:50AM 15 points [-]

I hate posting as I worry a lot about saying ill-considered or trivial things. But in the spirit of Eliezer’s post I will have a go.

This post reminds me of some of my experiences, and I really like the $20 note on the floor analogy.

I was a derivatives trader for over 20 years and was last at a large hedge fund. In the early days I was managing new types of currency options at a relatively sleepy British investment bank focusing on servicing clients. After a while I thought some of these options were underpriced by the market due to inadequacy of the models. I wanted to take proprietary positions by buying these options from other banks instead of selling them to clients, but management initially resisted on the lines of why do I think all the other banks are wrong especially some of them are much larger and supposed to be much more sophisticated. But after a year or so I did manage to buy these options and made quite a lot of money which helped to set me on my career in trading.

What I noticed over the years is that these anomalies tend to happen and persist when 1. There is a new product (so there is less existing expertise to start with) 2. The demand for the product is growing very quickly (so there is a rapid rise of less price sensitive and less informed participants). This also generates complacency as the product providers are making easy profits and vested interests could build in not disturbing the system. 3. Extra potency may arise if the product is important enough to affect the market or indeed the society it operates in creating a feedback loop (what George Soros calls reflexivity). The development of credit derivatives and subsequent bust could be a devastating example of this. And perhaps ‘the Big Short’ is a good illustration of Eliezer’s points. 4. Or you have an existing product but the market in which it operates in is changing rapidly eg. when OPEC failed to hold oil price above $80 in 2014 in face of rapid decline in alternative energy costs.

I wonder if the above observations could be applied more generally according to Eliezer’s ideas. Perhaps there are more opportunities to ‘find real $20 on the floor’ when the above conditions are present. Cryptocurrencies and blockchain for example? And in other areas undergoing rapid changes.

Comment author: ESRogs 30 October 2017 01:20:10AM 2 points [-]
  1. Extra potency may arise if the product is important enough to affect the market or indeed the society it operates in creating a feedback loop (what George Soros calls reflexivity). The development of credit derivatives and subsequent bust could be a devastating example of this. And perhaps ‘the Big Short’ is a good illustration of Eliezer’s points.

Could you say more about this point? I don't think I understand it.

My best guess is that it means that when changes to the price of an asset result in changes out in the world, which in turn cause the asset price to change again in the same direction, then the asset price is likely to be wrong, and one can expect a correction. Is that it?

Comment author: LukeDing 30 October 2017 12:53:29PM 2 points [-]

Thanks for the question and the opportunity to clarify (I think I may have inadvertently overemphasised the negative potentials in my post.)

Yes there is a feedback loop, but it doesn’t have to result in a correction.

I think cryptocurrencies and bitcoin could be a good example. You have a new product with a small group of users and uses initially. The user base grows and due to limited increase in supply by design the price rises. As the total value of bitcoin in circulation rises the liquidity or the ability to execute larger transactions also rises, and the number of services accepting the currency rises, and there are more providers providing new ways to access the currency; all these generate more demand which causes the price to rise even further, and so on.. But what was just described is a feedback mechanism, that in itself does not suggest whether a correction should be due or not. Of course at some point a correction could be due if the feedback loop operates too far. I think that’s why Soros said in 2009 “When I see a bubble forming, I rush in to buy” (I think he meant feedback loop when he said ‘bubble”).

What I was speculating is whether there are more chances for anti-consensual views to turn out to be correct in a fast evolving system.