But a few readers emailed to argue that it is optimal, for Jane Street, to train traders to take more risk than is optimal, for them. Jane Street, after all, is not betting its entire bankroll on any one intern, or trader, or trading team. Jane Street has a diversified portfolio of (it hopes) independent positive-expected-value bets created by different traders. If one trader bets her whole bankroll on a trade that is good in expectation, and it blows up and she loses everything, that’s fine for Jane Street: They have lots more traders doing bets like that, and in the long run the good bets will make more than the bad ones lose.
In fact, even the trader who blows herself up will be fine: Jane Street can just say “meh your heart was in the right place” and give her more money to play with. Lewis writes about a trade that Jane Street does on the 2016 election that ends up losing $300 million and being the “single worst trade in Jane Street history”:
[Bankman-Fried] was struck by what Jane Street did next: not much. There was no big firm-wide formal postmortem. No one was punished, or even questioned. On the one hand, Sam admired the way the firm distinguished process from outcome. A bad outcome, in and of itself, did not suggest anyone had done anything wrong, any more than a good outcome suggested anyone had done anything right.
Bankman-Fried’s interpretation here is that a team put on a trade that had positive expected value, but the coin flip landed the wrong way and it lost money. And his bosses looked at the facts and said “yes, this had positive expected value, so it’s no problem that you lost all this money; your job was to make positive-expected-value bets, not to make money.” [1] And no one got in trouble.
It is optimal for a firm like Jane Street with a lot of traders to encourage each of them to take a lot of positive-expected value risk, because Jane Street has enough of them to benefit from the law of large numbers. With enough independent positive-expected-value bets, it will make money, even if some traders lose money.
But if every Jane Street trader took the optimal amount of risk for her, she would probably put a high premium on not losing everything. She’d size her bets too small for the firm. Jane Street has to, in some sense, train the risk-aversion out of her.
And then some young traders leave Jane Street after just a few years to strike out on their own, and the lesson they take away is “I should bet a huge proportion of my bankroll on every positive-expected-value trade, because that is how I did it at Jane Street and they seemed to like that and we all got rich.” But that is not quite the right lesson! Bankman-Fried’s pathological aggressiveness might have worked really well within the restrictive environment of Jane Street, but it blew him up once he was on his own.
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