tag:blogger.com,1999:blog-8152901575140311047.post6658876904264304885..comments2024-03-28T12:49:46.624-04:00Comments on Musings on Markets: Macro Bets: A general framework..Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-8152901575140311047.post-70385944682193330782009-11-27T10:34:08.462-05:002009-11-27T10:34:08.462-05:00Two responses. The first is on whether or not to d...Two responses. The first is on whether or not to diversify your macro bets. On the one hand, going in all or nothing is not an option when you are uncertain about whether there is a mispricing in the first place and when it will be corrected (and one of these two conditions will almost always apply. Diversifying a macro bet is very difficult to do, because macro variables affect most asset classes. You can hedge a macro bet by doing one of two things - setting loss thresholds, where you unwind the bet and minimize losses or buying options, where you know what your maximum losses will be up front.<br /><br />On the question of the difference between quirky and irrational, it is the same difference between calling someone crazy and calling them eccentric. The first has a negative connotation to it, whereas the latter is more an expression of puzzlement. For too long in finance, we have labeled those who do not behave the way our models dictate as irrational. What behavioral economists have pointed out is that just because we cannot explain a certain type of behavior does not mean that the people indulging in it are crazy (or stupid).Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-23508782059176628862009-11-26T22:31:16.295-05:002009-11-26T22:31:16.295-05:00Could you describe the difference between a quirky...Could you describe the difference between a quirky decision and an irrational decision?Patrick Chttps://www.blogger.com/profile/11010956691509926206noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-25488266663410198472009-11-26T00:51:50.847-05:002009-11-26T00:51:50.847-05:00I referred to Paulson as just an example. Let me p...I referred to Paulson as just an example. Let me put my question in a different way. Hope the prof responds too. :)<br /><br />Let us assume there is a Paulson who is sure that a particular rally is building up to a bubble that he expects to go bust after X months. So he takes on a risk by buying some security (CDS for example) hoping the bubble will burst and he will profit from holding the CDS. Now, is it likely that he is so sure of the future that he just invests in the one CDS? Or does he also diversify his risk by investing in a security that is likely to pay-off in case the bubble doesn't actually turn out to be a bubble (or even if it does, it doesn't burst when he expects it to)? Also, if he chooses to diversify and he does turn out to be right about the bubble bursting, he stands to lose a significant amount through the diversified security. Which then somewhat moderates his pay-off from his primary macro-bet.<br /><br />So is this usually done? Do macro bettors just go ahead with an all-or-nothing strategy or do they place multiple macro-bets for different scenarios and we only notice the one bet that has paid off?perpetual wondererhttps://www.blogger.com/profile/12795860415528166734noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-34498421613585300542009-11-25T15:34:44.683-05:002009-11-25T15:34:44.683-05:00Paulson was not going to lose anything regardless ...Paulson was not going to lose anything regardless of how the bet went. in the "worst" case scenario, they would have held on to the securities if they had not defaulted and have made 1% spread on the interest payments. at least this is what he mentioned at a talk at NYU Stern.Anonymoushttps://www.blogger.com/profile/00655554211034276979noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-33839042801159678962009-11-25T15:06:40.703-05:002009-11-25T15:06:40.703-05:00Diversification should only work for loosely corre...Diversification should only work for loosely correlated investments.I am not an economist, but as a layman, think that macro economy related variables are so much interlinked that diversification is very hard to achieve. Overall, a good reminder article on marco investing. Thanks.Compendiumhttps://www.blogger.com/profile/03603660625644876170noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-6786185977030691232009-11-25T03:42:56.253-05:002009-11-25T03:42:56.253-05:00@ perpetual...very good question on application of...@ perpetual...very good question on application of diversification principle in macro bets...<br /><br />Prof...wats ur view..is it possible to diversify ... if yes then how??<br /><br />Regards,<br />AmarImmortalhttps://www.blogger.com/profile/02889853969712537454noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-40930556554032642872009-11-24T15:47:01.065-05:002009-11-24T15:47:01.065-05:00Thanks for revisiting this issue. Does this mean y...Thanks for revisiting this issue. Does this mean your view on Soros has mellowed?Henry Beehttps://www.blogger.com/profile/12176365362835822750noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-25414246980204668742009-11-24T10:12:28.758-05:002009-11-24T10:12:28.758-05:00That remains the question. To be considered a grea...That remains the question. To be considered a great investor, you need to be a consistent winner. Will Paulson be as successful on his next macro bet and the next one? Only time will tell (and it has not been kind to other macro bettors in the past)Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-38911533913321786612009-11-24T02:24:25.416-05:002009-11-24T02:24:25.416-05:00Sir, I have always wondered if people like Paulson...Sir, I have always wondered if people like Paulson who have made a lot of money out of a single macro bet had made only that one bet? Or do they also use the principle of diversification even while placing macro bets? <br /><br />Because I find it hard to believe that there are people who are so sure of the future that they are risking so much on events that are a function of several variables. <br />Is it likely that they macro bet on many events, make money only on a few and lose on some others? (like you said, the odds are stacked against you when you macro-bet) <br /><br />And if that is true, is it only the bets which made them money that make it through to the media?perpetual wondererhttps://www.blogger.com/profile/12795860415528166734noreply@blogger.com