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Malcolm Gladwell on Nassim Taleb, Victor Niederhoffer and Fat Tails

As you read Gladwell’s PDF…keep in mind trend followers prepare every day for those “totally unexpected events”. That’s how they make money.

Trend following strategies are about “fat tails”. What does that mean? Patrick L. Welton, of Welton Investment Corporation explains:

No, there is no evidence or logical way to support this. Starting from first principles, we know the source of return to trend-following techniques results from sustained market price movements. Examination of recent and past data demonstrates empirically similar sustained price movements. Statistical examination of the distribution of prices also is similar over large enough data samples in that the kurtosis, or fat tails, is also similarly present. From a fundamental perspective, we could summarize the majority of return opportunities falling into several categories: macro-economic changes such as interest rates, asset values, inflation rates, and relative currency valuations taking place over months to years; physical supply and demand imbalances such as for commodities including seasonal stress factors taking place over weeks to months; and short-term market phenomenon such as liquidity contractions generally lasting from weeks to months. The common thread woven throughout these is the sustained change of price resulting from future unknowable events. Human reaction to such events, and the stream of information describing them, takes time and runs its course unpredictably. The resulting magnitude and rate of change of price is not reliably foreseeable [which is why trend following works].

More on Nassim Taleb.

More on fat tails and outliers.

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