Re: 10k post
Ill answer the other questions when I have more time. For now, ehre is something which DciferThs just wrote which pretty much talk about the same trade off between active management and passive management.
"this seems to pop up constantly.
imo there are two different widely known methodologies for involvement int he market.
one is passive, strategic, investing (beta).
the other is active, tactical, trading (alpha).
sometimes the two commingle (i.e. in a mutual fund that has a long bias).
sometimes you can separate the two (i.e. investing in an index, using futures to replicate the exposure and take the remaining $ to an uncorrelated alpha generator like a hedge fund...assuming you are good at picking managers and finding a stream like that).
the point here is that alpha generation is far more like poker in that it is negative sum costs included.
beta is not like poker. you can be "guaranteed" a return by simply placing money in a diversified portfolio and letting it grow. there is no such easily acheivable analogy in poker (the only one that even comes close, bust still isn't, is finding great players who need staking and investing in them. problems here are massive adverse selection and moral hazard: those who need staking are typically not players an investor would like to stake and those who don't need staking are more likely to be the highly successful players in whom an investor would love to invest. moral hazard comes from after the investment. if a player sees his losses as-partially- covered, he/she may engage in behavior that he/she would not have done if tthat money was theirs)
anyways, now that i've listed all that out, the similarities between beta and poker are none that i can think of because in the markets, i think picking alpha managers is really freakin ghard, similar to the problems described above with picking winning players.
there is no risk premia creation/distribution in the poker world.
alpha generation though i think does have some similarities as mentioned in this thread.
so if you rephrase the OP to read: "difference between poker and alpha generation" you are far more hard pressed to find a difference.
the MAIN one...and a massive one...is that alpha generation is not and will never be normally distributed since the underlying process is both risky AND uncertain (i.e. the overall fundamental risks are unknown even to the participants) wheras poker is mostly just risky (i.e. 52 cards, known distribution) and thus can be modeled in that portfolio sense with a normal distribtuion thanks to the law of large #s (obviously you can start talking about the players and their deviation from their expectation. even with large #s of players, their errors could be correlated if caused by essentially the same psychological forces etc.). but overall, the DRIVER of the process in poker can be normally distributed whereas the DRIVER of the process in trading is not.
Barron "
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