Aitken: Volatility Scaling Relies on the Fallacious 'Slower Fool Theory'
James Aitken · James Aitken – Systemic Risk in a Crisis (Capital Allocators, EP.126) · Mar 18, 2020 · at 11:29
Macro strategist James Aitken discusses systemic market fragility and rapid drawdowns with Ted Seides during the onset of the March 2020 crisis.
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“Volatility scaling, or the assumption of volatility scaling, I think had a large hand in the disruption we've seen, and just to finish this point, there was a marvelous article written in the autumn of 1987 by an extraordinary Chicago trader called Richard Dennis, and Richard wrote of the slower fool theory. And his idea was, and it's so brilliant, that it's perfectly okay to own all the same instruments as everyone else, same QSIPs, the same issues. It's perfectly okay to apply the same amount of leverage. But don't worry, I'll be quicker than everyone else to get out. And we've just had another real-time reminder of that fallacy.”
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