On Alonso and Delta Hedging and Creating Positive Black Swans (and louvvu of course)

Yesterday, on the Twisted Shout blog, I had blogged about Xabi Alonso, and his methods for scoring goals. Complete with videos of a few of his goals, and incomplete because I couldn’t find a few other videos, I explained how he goes about the entire process. He takes long shots, I had explained. From a distance. Hoping to catch the goalkeeper off guard. And accurate enough to get the ball in the net most of the time.

Towards the end of The Black Swan, Nassim Taleb talks about how you can make black swans work for you. He talks about industries such as moviemaking and book publishing, and he says they traditionally thrive on positive black swans. They lose a little money on most projects – books or movies, but make significantly more money when one of them succeeds.

The book industry, Taleb argues, has now lost its traditional revenue model. Nowadays, the norm for publishers is to dole out huge advances to authors who will potentially write blockbusters. This, Taleb says, now exposes the publishers to huge negative black swans. The advances are so huge that if a book sells well they recover their investments. If not, they are prone to losing a huge amount.

I notice a similar problem in the romance industry. Suppose you have been hitting on, or even seeing, a girl for a long time, and it’s now time for measurement. By conducting the measurement experiment now, you are exposing yourself to a huge negative black swan. You have already made considerable investment in the relationship, mostly emotional but also monetary and temporal. And what if the measurement doesn’t go the way you want it to go? You are already in the D (desire) of Kotler’s AIDA. It will take a long time for you to recover from it, and this could even be career threatening, as I had discovered the hard way a couple of days years back.

Now, my theory with relationships (I don’t know how much you want to trust this – since I’ve never been in a relationship) is that in order to succeed, both parties should be at least in the I (interest) zone. And one of the parties has to be in D zone. This is a necessary but not sufficient condition for the relationship to go thorugh.

So, how about testing whether the other person is in the I zone when you are also in I zone? If she is, then well and good – you can start the process of figuring out if you want to get into D, etc. If she isn’t you can quickly cut your losses and move on. If she does admit to being interested in you, it’s great. It’s a positive black swan. And if she tells K, you haven’t really invested much in the relationship so it shouldn’t be hard. Right? So that’s how my mind ran when I thought about this problem yesterday.

I sent her a mail asking her for permission to put blade on her. I explained to her in the mail (i’ll probably blog the mail at a later date – I’m quite proud of my efforts on second thoughts I won’t blog the mail. I think she deserves exclusivity to that masterpiece) that I ever since I met her a few days back I have gotten really interested in her, and am considering the possibility of blading her. That if she is not interested in getting bladed by me, then there is no point in my continuing and wasting both our times and energies, and so she should tell me that right now. I sent this mail to her earlier this evening and I’m still awaiting her reply.

So where does delta hedging fit into this?  It is like the road to Ithaca as this poem mentions. It is about the journey being more enjoyable than the destination. It is about the process of doing something being more enjoyable than the results. It is from the excitement you get just by doing something for the heck of it. These are all what I call as second order effects. They are, in effect, derivatives. First order derivatives of something you are doing, which is effectively the underlying.

As I had mentioned in my previous post, by going ahead with the blading, the only thing I had to lose was my confidence. My form. And if I had gone about blading the conventional way, poking and probing, and making small inroads, the process too would’ve been excruciating, and would’ve added to the pain of the blade not succeeding. So was there a way in which I could hedge out the loss of form and confidence?

I think I’ve been fairly ingenious in going for my long shot. I’m doing something unusual by going about it the unconventional way. Add to this the joy of sitting and drafting that letter to her (yes, it’s a masterpiece). And the possibility of the insights I might gain from this process. And of blogging it, as I am doing now. As soon as I had hit upon this method, i realized that the second order advantages from this were huge. And would easily hedge away any blues that failure in my attempt would bring. It was like getting a put option along with a stock. You knew that your losses were capped.

On the other hand – if she accepted – the returns would be huge. It would be a positive black swan. Capped losses and uncapped gains! Once I had figured this out it was a no brainer that I should go for it. And I have gone for it. A long shot a la Alonso. And I’m waiting for the result. Wish me luck.

13 thoughts on “On Alonso and Delta Hedging and Creating Positive Black Swans (and louvvu of course)”

  1. Fuck, this post made my day! 🙂

    Btw, yeah, Girl = Long stock, and by this strategy, you’re buying a put, which in effect amounts to buying a call.

    The price you might be paying for the option is that you’ll be giving up the minute moments of happiness you get by direct blading and building up hopes. Hence, if you know yourself and that these moments of temporary happiness don’t mean much, you’re getting the option for a cheap price. And in these markets, it’s always better to hedge 🙂

    As you said, it’s the uncommon way. So you might have to consider the liquidity in the market for this option. Lets hope she writes it!

    Go ahead Wimpy! Good luck!

    1. hehe thanks da.

      there’s no liquidity in the market. it’s all OTC.

      and yeah – you’re right in the sense that the minute minutes of happiness you get by direct blading aren’t worth that much to me. for me, blading is a lot of pain.

  2. Interesting, but there’s a non zero probability that your masterpiece mail may become an e-mail forward considering that women share stuff a lot with their female friends (particularly blade attempts made by various men towards them). I would say there’s a reputation risk here.

    Still its called a long shot for a reason. Good luck.

    1. i agree with the risk that you’ve mentioned here. tomorrow i’ll publish my conversation with Rahul RG on this subject. he deals with these issues more technically.

  3. I bow to your extreme cheapness, as you have truly described in your gtalk conversation, this is truly awesome and immodest.

    Good luck da, but just be a little more circumspect about being public about the details of your interactions with her should things take the course all of us wish for it to take.

  4. Good luck!!! As Hari says, might not be the best idea to blog the mail, if you’re hoping for a long-term positive result out of all this.

  5. the process of flirting says a lot to the girl. Hedging losses here may not put you in a favorable position. So it should really be a masterpiece else will come across as cowardly. But given that women like to be flirted with, i am guessing she will keep it. 2p- dont expect a reply.

  6. Wimpy

    What a worshtax blog post. What is the matter with you? The day you start comparing chicks to put options and AIDA frameworks, I think you have lost it.

  7. Ah, now I see more. Should’ve read this first – before I responded to your other post (Rahul chat, compound option etc).

    Continue to find the options analogy highly entertaining – but I’ve a bunch of quibbles.

    You talk here of “measurement”. And I saw the link to “quantum states”. But am still not sure if your use is the same as mine below (but it could be).

    You were/are sitting on an underlying asset – the babe or the relationship or friendship – with a potential future (binary) payoff. (At least those are the terms in which you view the “payoff”).

    But you are in an incomplete info setting. The underlying does not trade (beacuse you avoid a certain type of woman), and its true current value could be much higher or lower than your current estimate. (I.e. jumps).

    Besides, unlike your 2-state example in the link, you recognize that there are mulitple (4?) states corresponding to AIDA. I.e. your “measurements are required over time – to reveal the true state at that time. And you *assume* that vol will go down as the state “progresses”. (Negative correlation). Your “model” of future information (i.e. volatility) is whatever AIDA means (don’t know any MBA-stuff; but I saw the link). If and when you’ve been down the relationship path a few times, you might be less sanguine about vol.

    So with all the “imperfections” above, you still want to use the delta-hedge label?! Why not stick with humble, plain-old “hedging” instead.

    Also note that since, as you point out, the upside-downside total “hedged” payoff is asymmetric (unlimited/flat) – that’s a further nail in any “hedge” label.

    You may want to think of phrasing your (regardless-of-labels, highly insightful) discussion of “hedging” in the pursuit of women as the more commonplace “acquisition of human capital” that many of us do as we “learn by doing” at our jobs.

    Last point: this post + my other reply to the compound option thing makes me think a good analogy is the R&D process (of a typical, say, pharma firm) in a real option framework. There are academic papers on this.

    Really-Last point: The ordinary guy on the street when asked what “hedge” to use when pursuing a woman would probably suggest the time-honored playing-the-field or stable-of-horses strategy.

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