Tail Risk and Exponentiality

5 minute read.

I read/lis­tened to Nas­sim Taleb’s In­cer­to in 2024 and it must have had a big­ger ef­fect on my think­ing than any oth­er book in the last few years.

Fooled by Ran­dom­ness in­stilled a healthy sus­pi­cion of users of sta­tis­tics.

The Black Swan es­tab­lished a pro­tec­tive con­sid­er­a­tion for high­ly un­like­ly events,

An­tifrag­ile an aware­ness of pay­out space. That is, ask­ing my­self “How much po­ten­tial pay­out per cost are we talk­ing about?”. Ray Dalio’s Prin­ci­ples had al­ready in­tro­duced to me to this idea as asym­met­ric risk-re­ward, but Taleb’s book made it more ap­pli­ca­ble.

Skin in the Game con­firmed and deep­ened my un­der­stand­ing of in­cen­tives.

I at­tempt­ed the Tech­ni­cal In­cer­to with Sta­tis­ti­cal Con­se­quences of Fat Tails and while the gap in un­der­stand­ing of math­e­mat­i­cal no­ta­tion al­most seems man­age­able, I de­cid­ed not in­vest the time to get out of it what is oth­er­wise well de­scribed in his oth­er books at this point, de­spite the math­e­mat­i­cal lit­er­a­cy as a byprod­uct po­ten­tial­ly be­ing use­ful.

# Note on Op­tions Trad­ing

I might have been one of those re­tail traders that Bar­clay’s like to feast on <https://www.scribd.com/doc­u­ment/521690968/Bar­clays-US-Eq­ui­ty-De­riv­a­tives-Strat­e­gy-Im­pact-of-Re­tail-Op­tions-Trad­ing>. Buy­ing short-term out-of-the-mon­ey op­tions is very dif­fer­ent from the tail-risk hedg­ing strate­gies de­scribed in the books.