Friday, February 18, 2011

Dealing with volatility

Phil Galfond of Bluefire Poker mentioned in an interview (at Poker Static) that many players have a hard time dealing with "variance", i.e. volatility of performance over time; this probably applies to not just poker and hedge funds, but all business models today for those not proficient in statistics.


Naturally, when volatility jumps negatively, someone of little understanding in probability theory would feel inclined to give up entirely. This probably explains the high numbers of business failure each year.

On the other side of the coin, in cases where volatility spikes positively in the short run, it fools amateurs (poker, trading, business...) into becoming over confident which usually leads to taking unfavorable risks.

Down swing management

As conventional businesses (excluding poker/financial trading) depend heavily upon local economic growth, any slow down in inflation means lower purchasing power of potential customers, which hurts profit. In this regard, business managers must learn to estimate probability of economic growth to prepare for (hopefully) limited losing periods while maximizing profits in good periods. Again, this comes back to statistical expectancy.

0 Reflections: