People Lie About Alpha

Friday, September 11th, 2009

If you take risks and make money, Eric Falkenstein notes, then, after the fact, everyone says that you took good risks, but if you take risks and lose money, well, you were just being foolish.

So people lie about alpha. They pretend that their returns from taking risks (beta-bets) are risk-adjusted returns (pure alpha). But then, it has long been the case that successful people are good at doing one thing while saying they are doing another:

Augustus Ceasar was successful because unlike Julius Ceasar he appeased the senators by making it seem like he restored the Republic (where the senate is in charge), when in practice he had probably more power than Julius Ceasar. When unions are successful they promote their agenda by appealing to how they are helping their customers, assiduously maintaining quality via their exclusionary rules. Affirmative Action was successful because proponents said it definitely does not imply quotas. The key is that many large strategies involve duplicity.

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