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Double or Nothing - How Wall Street is Destroying Itself

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As Nassim Taleb described in The Black Swan these kinds of trades, betting large amounts for small frequent profits is extremely fragile because losses will eventually happen and of course, if you are betting big, losses can also be big.

If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral. This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which probably makes these kinds of practices so attractive to the gamblers of Wall Street. Martingale works by betting and then doubling your bet until you win. This - in theory, and given enough capital - delivers a profit of your initial stake every time.

Historically, the problem has been that bettors run out of money, simply because they don't have an infinite stock of capital. However, thanks to Ben Bernanke, that is no longer the case. The key feature of the system is that it delivers frequent small-to-moderate profits, and occasional huge losses when the bettors run out of money.

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