Passive, scared people refusing to act waste the time and money of their betters

JustinCEO's picture
Submitted by JustinCEO on Sun, 2018-05-13 20:35

I was reading this discussion of mathematician and hedge fund manager Edward Thorp's book _A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market_

http://curi.us/2107-i-liked-ed...

And one part quoted from the book particularly stood out:

I figured out a solution. I called our head trader, who as a minor general partner was highly compensated from his share of our fees, and gave him this order: Buy $5 million worth of index futures at whatever the current market price happened to be (about 190), and place orders to sell short at the market, with the index then trading at about 220, not $5 million worth of assorted stocks—which was the optimal amount to best hedge the futures—but $10 million. I chose twice as much stock as I wanted, guessing only about half would actually be shorted because of the scarcity of the required upticks, thus giving me the proper hedge. If substantially more or less stock was sold short, the hedge would not be as good but the 15 percent profit cushion gave us a wide band of protection against loss.

I went through a detailed explanation of my outside-the-box analysis of why this trade was a windfall opportunity. But this day was beyond anything our trader had ever seen or imagined. Gripped by fear, he seemed frozen. He refused to execute the trades. I told him to do it for PNP and do it now, or else I wanted him to do it for my account. If that was his choice, I told him I would later tell all the other partners how the profit I made would have, but for him, belonged to the partnership rather than to me.

Here was my reasoning. If, because of the uptick rule, only about half the shorts got off, then we would be properly hedged and make about $750,000. If none got off (extremely improbable), we were buying the futures at an enormous discount—the index itself would have to fall more than another 13 percent before we began to lose. At the other extreme, especially in a market panic, there was virtually no chance all the shorts would go off. Even if all the orders to sell short were completed, the market would have to rise more than 14 percent for us to lose money. To protect against this possibility, I told my head trader that when we filled close to half the short-sale orders, he should cancel the rest. After he finally complied with my request and completed the first round, I ordered a second round of the same size. In the end we did get roughly half our shorts off for a near-optimal hedge. We had about $9 million worth of futures long and $10 million worth of stock short, locking in $1 million profit. If my trader hadn’t wasted so much of the market day refusing to act, we could have done several more rounds and reaped additional millions.

Temple comments on this:

Thorp's hedge fund lost millions of dollars because their stock trader didn't do his job. It's interesting to me how much dealing with people played a role here. Thorp couldn't just decide what to buy and sell, he had to persuade someone to do it (by threats, because explaining why it was profitable didn't work), even though the trader would not be affected by the outcomes of the trades and it was his job to make the trades Thorp chose.

This whole scene from the book -- especially the aspect of having to threaten the trader some -- reminded me of this scene from Atlas Shrugged:

"This is Dagny Taggart, speaking from—"
"Who?"
"Dagny Taggart, of Taggart Transcontinental, speaking—"
"Oh . . . Oh yes . . . I see . . . Yes?"
"—speaking from your track phone Number 83. The Comet is stalled seven miles north of here. It's been abandoned. The crew has deserted."
There was a pause. "Well, what do you want me to do about it?"
She had to pause in turn, in order to believe it. "Are you the night dispatcher?”
"Yeah."
"Then send another crew out to us at once."
"A full passenger train crew?"
"Of course."
"Now?"
"Yes."
There was a pause. "The rules don't say anything about that."
"Get me the chief dispatcher," she said, choking.
"He's away on his vacation."
"Get the division superintendent."
"He's gone down to Laurel for a couple of days."
"Get me somebody who's in charge."
"I'm in charge."
"Listen," she said slowly, fighting for patience, "do you understand that there's a train, a passenger limited, abandoned in the middle of the prairie?"
"Yeah, but how am I to know what I'm supposed to do about it?
The rules don't provide for it. Now if you had an accident, we'd send out the wrecker, but if there was no accident . . . you don't need the wrecker, do you?"
"No. We don't need the wrecker. We need men. Do you understand? Living men to run an engine."
"The rules don't say anything about a train without men. Or about men without a train. There's no rule for calling out a full crew in the middle of the night and sending them to hunt for a train somewhere.
I've never heard of it before,"
"You're hearing it now. Don't you know what you have to do?"
"Who am I to know?"
"Do you know that your job is to keep trains moving?"
"My job is to obey the rules. If I send out a crew when I'm not supposed to, God only knows what's going to happen! What with the Unification Board and all the regulations they've got nowadays, who am I to take it upon myself?"
"And what's going to happen if you leave a train stalled on the line?"
"That's not my fault. I had nothing to do with it. They can't blame me. I couldn't help it."
"You're to help it now."
"Nobody told me to."
"I'm telling you to!"
"How do I know whether you're supposed to tell me or not? We're not supposed to furnish any Taggart crews. You people were to run with your own crews. That's what we were told."
"But this is an emergency!"
"Nobody told me anything about an emergency."
She had to take a few seconds to control herself. She saw Kellogg watching her with a bitter smile of amusement.
"Listen," she said into the phone, "do you know that the Comet was due at Bradshaw over three hours ago?"
"Oh, sure. But nobody's going to make any trouble about that. No train's ever on schedule these days,"
"Then do you intend to leave us blocking your track forever?"
"We've got nothing due till Number 4, the northbound passenger out of Laurel, at eight thirty-seven A.M. You can wait till then. The day-trick dispatcher will be on then. You can speak to him,"
"You blasted idiot! This is the Comet!"
"What's that to me? This isn't Taggart Transcontinental. You people expect a lot for your money. You've been nothing but a headache to us7 with all the extra work at no extra pay for the little fellows."
His voice was slipping into whining insolence. "You can't talk to me that way. The time's past when you could talk to people that way."
She had never believed that there were men with whom a certain method, which she had never used, would work; such men were not hired by Taggart Transcontinental and she had never been forced to deal with them before.
"Do you know who I am?" she asked, in the cold, overbearing tone of a personal threat.
It worked. "I . . . I guess so," he answered.
"Then let me tell you that if you don't send a crew to me at once, you'll be out of a job within one hour after I reach Bradshaw, which I'll reach sooner or later. You'd better make it sooner."
"Yes, ma'am," he said.
"Call out a full passenger train crew and give them orders to run us to Laurel, where we have our own men."
"Yes, ma'am.” He added, "Will you tell headquarters that it was you who told me to do it?"
"I will."
"And that it's you who're responsible for it?"
"I am."
There was a pause, then he asked helplessly, "Now how am I going to call the men? Most of them haven't got any phones."
"Do you have a call boy?"
"Yes, but he won't get here till morning."
"Is there anybody in the yards right now?"
"There's the wiper in the roundhouse."
"Send him out to call the men."
"Yes, ma'am. Hold the line."
She leaned against the side of the phone box, to wait. Kellogg was smiling.
"And you propose to run a railroad—a transcontinental railroad—with that?" he asked.
She shrugged.

Being a passive, scared person unable to exercise their own judgment is a very bad lifestyle for your own life. But it also creates negative externalities for others. It makes it difficult to interact with and cooperate with you in mutually beneficial ways. Your weakness becomes a headwind they have to push against.

Solution: be more Objectivist Smiling