Beginning in 1969I was introduced to M. Leibowitz, with more detail when doing my PhD at NYU. His work and preceding casino work by several people had huge impact, primarily in helping market makers, including casinos, more accurately manage risks, hence increasing profits.
What almost all students of this work and the Meton-Scholes etc developments is that their approaches, every single one of them, depended on two things: 1. All of these are inherently stochastic, thus only work with quite large data sets. 2. They are built to be predictive. The first one means that the primary beneficiaries will be market makers and casinos. The second one raises the justifiably dreaded "Boundary conditiosn".
As I have mentioned before I had the misfortune of working on moped of LTCM and AIG. My hero, people I had studied, learned from and nearly deified, walked blithely into territory they did know would cause their models to fail. Those two entities became so dominant in their respective arenas that they themselves became victims of their own success.
There is an old saw that I learned from my last thesis advisor:
Some is good,
More is better,
Only too much is enough.
Since that time I worked on derivative design, primarily related to FX and bond markets. The team of which I was a part all came from the same places as the earlier mavens did, and repeated several fo the same mistakes. Creating a security to arbitrage Kuwait Dinar vs US$ and Japanese Yen should have alerted us to the high probability that the market was not deep enough to allow anything stochastic to work. Due to our stupid luck our entire business was purchased by an (in) famous huge European bank. It did not work out so well for them.
Retail investors over and over think they can consistently beat markets by using increasingly sophisticated (check out the etymology, that is NOT a compliment) models. By the nature fo such models, all stochastic models in fact, depend on continuing the same conditions that applied in the model development sample. No matter the wonderful Nobel Prize winning advances are, all end out being stochastic. (check out the etymology of stochastic, then the defintion. The former os from the Greek for 'guess'. The latter dresses up 'guess' by referring to random probability distributions.
There are two reason why retail investors never win consistently:
First, the only way any of these tools work si the law of large numbers. That means the 'house' wins, while the eventual losers brag about their wins and their sure systems.
Second, even for the 'house' there are not consistent wins. There are countless cases. The problem is that most of them end out blaming fraud, often legitimate, but a huge causal factor enabled the fraud, that was excessive dependence on stochastic models:
A handful of such names:
American Express and the great sale oil swindle,
AIG,
Lehman Brothers,
LTCM,
Bank of America NT&SA
Wachovia Bank
The list goes on. A common thread is over dependence on stochastic, inattention of boundary conditions and blind faith in very, very smart sophists.
Not for one second do I think I man expert. I have, however, worked on the mop of several of the ones in the list above. Every one was deeply populated by people far smarter and articulate than am I.
On the other hand, I did learn that it makes zero sense to play in a rigged game or one populated by decision-makers who ignore basic facts.
Over the decades that somewhat jaundiced view has been productive for me.
One key thing it does is make me obsessive to understand everything I possibly can about an investment I make. If I am uncertain, I sell. That makes me hold very few equities, and necessarily so, because I cannot understand enough things to 'diversify'. Right now, for example, I own three securities. Obviously one of them is TSLA.
My last point. It is unbelievably fun to deal in derivatives, puts, calls and every other choice, all are addictive. As gamblers know, it is an adrenaline rush to win. It is almost irresistible to minimize losses. Think about that before playing this game. Lotteries, Casinos and derivative securities markets are all working on the same basis. In the first two any rational person understand that. With securities markets people keep ignoring that market makers have minimal supervision, and the system is structured to allow them to hide their own losses. It'snot for nothing that one such trick is called "the Madoff Rule". When the originator makes the rules can you win consistently?
Check these out for reference:
