The Co-Founder of Long-Term Capital Management Wants You to Learn Your Financial Formulas
ByWhat coin-tossing can teach us about investment.
“You’re invited to a talk by a hedge fund manager who was a partner at a fund that famously flopped about 20 years ago. You turn up, hoping to hear some valuable insights, or at least some entertaining tales, but instead you are offered a stake of $25 to take out your laptop to bet on the flip of a coin for thirty minutes. You’re told the coin is biased to come up heads with a 60 percent probability, and you can bet as much as you like on heads or tails on each flip. You will be given a check for however much is in your account at the end of the half hour.”
So begins a new paper published by Victor Haghani, co-founder of the collapsed hedge fund Long-Term Capital Management LP who’s now CEO of Elm Partners Management LLC, a portfolio of low-cost index and exchange-traded funds. Co-authored with Elm Strategist and Pacific Investment Management Co. Portfolio Manager Richard Dewey, the results of the experiment highlight an apparently gaping hole in the quantitative knowledge of “financially trained” individuals at a time when Wall Street is fiercely debating the worth of active investment management…
The Co-Founder of Long-Term Capital Management Wants You to Learn Your Financial Formulas
