Tuesday, June 08, 2010

Success and Convexity Part 1

I am going to do a series of posts about personal success and Convexity. It’s an interesting word and can be used as a lens to view personal success from multiple angles. In a previous series of posts I explored the metaphor of entropy and personal success. However, recently, as I was reading the magnificent books by Steven Drobny Inside the House of Money and The Invisible Hands , I noticed that many of the brilliant hedge fund managers he interviewed repeatedly used the term “convexity” to define the characteristics of the financial returns they were seeking. Now there are precise financial definitions of this term, but my overall impression was that these investors were using convexity to define an investment that had a strong potential to do increasingly well if conditions were right, but had the additional property of not creating a ruinous loss if things went bad. In short, they were seeking something like this:

Now, this blog has often tried to take concepts from the business and scientific world and examine them for their potential to facilitate personal success. So, it occurred to me one day that Convexity might be one of those concepts.

Simply put, convexity (and here I am speaking of positive convexity), might be defined as opening the door to many good things, while limiting the access of incoming bad things. We seek convex outcomes. Things that could get better and better. And a much-to-be hoped-for corollary of those outcomes would be: we also want to achieve those outcomes at as low a risk as possible. Strictly speaking, we would like an unbounded upside and a bounded downside.

We’ll examine this concept further in upcoming posts.

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