I was inspired by Talebâ€™s simulations on the hidden risks of “blowing up” as a Wall Street trader, so I built a Monte Carlo simulation to test out this theory first hand. I defined a â€œblow upâ€ of any trader having a greater than 20% drawdown in any given year.
Hereâ€™s how I did it, please follow along and provide some critique, Iâ€™m not 100% sure if I did this correctly.
First I generated a random % return per year over a 5 year period, I did this for 1000 hypothetical traders and assigned a point value system to these random returns; 0 meant that you blew up before the first year was over (drawdown > 20%), 3 meant you were profitable for 3 years before blowing up, and 5 meant you made it to 5 years of profitability.
Then I calculated the mean and standard deviation for the point totals across the 1000 traders, modeled them over 10,000 observations, and produced a normal distribution curve.
The results were astounding!
You have roughly 1.42% chance, or 70:1 odds, of surviving 5 years as a Wall Street trader! Wow!
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