The desk where everyone's strategy works

Question

A colleague argues: "Every trader still on our desk uses aggressive martingale sizing, doubling down after losses, and they are all profitable this year. So the strategy clearly works."

What is wrong with this reasoning?

Accepted Answer

The bias. You only see the traders who are still on the desk. Martingale sizing produces long stretches of small, steady gains punctuated by rare, catastrophic losses when the doubling runs into a sustained adverse move. The traders who hit that catastrophe blew up their books and were let go, so they have been silently removed from the sample. The survivors are precisely the ones who have not met their tail event yet, which is not the same as the ones for whom it will never come. A toy illustration. Suppose 16 traders all adopt the strategy. Each year a chunk of them hit the blow-up and are …

The desk where everyone's strategy works

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