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Can knowing tomorrow’s news make you rich? That’s not a foregone conclusion

Participants in the Crystal Ball Trading Challenge were given advance data but still didn’t do very well

Players traded in US stocks and bonds, and were aided by information on the front page of the Wall Street Journal one day in advance. Photograph: Sasha Maslov/New York Times
Proinsias O'Mahony's picture
Proinsias O'Mahony
Tue Oct 15 2024 - 05:45

Nassim Taleb, the author of Black Swan: The Impact of the Highly Improbable, once quipped that “if you give an investor the next day’s news 24 hours in advance, he would go bust in less than a year”.

He may have had a point, according to the authors of a new study inspired by Taleb’s tweet.

The so-called Crystal Ball Trading Challenge involved 118 young adults trained in finance, and gave them the chance to grow a $50 stake by trading in US stocks and bonds. Participants were aided by information on the front page of the Wall Street Journal one day in advance, but with stock and bond price data blacked out.

The players “did not do very well”, with about half losing money and one in six actually going bust. Of the roughly 2,000 trades made, the players guessed the direction of stocks and bonds correctly only half the time. That’s unimpressive, but they did better than the 1,500 people who played the game for fun on the authors’ website. Here, the median outcome was a 30 per cent loss, with 36 per cent of players going bust.

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So news is useless?

Not so fast. The authors also invited five seasoned and successful macro traders to play the game, and they finished with big gains. The difference is largely explained by trade sizing. Experienced traders made bigger bets when the odds were in their favour, whereas there was “little discernible logic or rationale” to others’ trade-sizing decisions.

Think you can do better? The trading game can be played online at https://elmwealth.com/crystal-ball-challenge/.

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