The Joy of Randomness

Chidem Kurdas

That’s one of the lessons of Antifragile, the latest book  from Nassim Nicholas Taleb.  I was going to write about it but was directed to an excellent  review by John Hagel.  I don’t have much to add to his comments and the piece by Taleb in the WSJ.

Except to say that, yes, it would be great if we had ways to benefit from uncertainty and randomness, but as a practical investment matter this is expensive. Certainly one can go long volatility – though volatility is an imperfect proxy for randomness – and thereby gain from fluctuations.

But such investments themselves are highly volatile and can lose a lot quickly—click for an example.

Nice as it is to have insurance against market disaster, that insurance is in effect very costly once you factor in losses. As a result, investors don’t like to put much of the portfolio on crisis hedging.

Nevertheless, there is a growing number of products that do this—see my recent post on the JP Morgan volatility index, which is investable via notes the bank issues.

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