Ironically, spacetime is not only the culprit for our losses, but equally so, for our inability to gain as much as we potentially can. The St. Petersburg Paradox, is once again dubbed a paradox, but only because spacetime cannot be decomposed. In this purported paradox, one who faces a payoff with literally infinite upside will not pay that much to take the bet. Why would anyone not pay half your net worth to win all the money in the world? Quite simply, because the space (the mathematically robust expectancy) will not necessarily occur this time, and we’d lose half our net worth. And not only do we lose that much, we may even be so unlucky as to stay to watch the path of the very next player, who wins umpteen times our net worth. The pain of spacetime is just not bearable.
In closing, I must refer back to my highly bifurcated moments of appreciating Einstein, who discovered that time and space are interwoven, and proved that the way in which they are interwoven depends on the observer. In the investment world, the observer is the manager or the allocator, who both observing and experiencing, day in and day out, the interwovenness. And as such, the relativity is not just with respect to our frame of reference, it is to our bank account and/or our leverage factor — or at the end of the day, to our investor’s monthly statements. Einstein would likely not have wanted this association to his grand scholastic achievement, and may even have scoffed at its heretical use in financial analysis, but he would certainly have understood that drawdowns, in his retirement account, were in fact relative to his remaining life expectancy.
Wayne Himelsein
Chief Investment Officer
Logica Capital Advisers, LLC
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