Risk Management · Lesson 12 · Advanced
The Turkey Problem
You recognize suppressed volatility as a buildup of tail risk and turn the leverage down when everything seems calm.
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Calm is not safety
The turkey is fed for 1000 days, its confidence rising daily. It peaks on the day before Thanksgiving. Absence of harm is no proof of safety.
Suppressed volatility builds up hidden tail risks. A long calm winning streak, low vol and funding near zero are often the antechamber of the vol spike.
The turkey problem: 1000 calm days, then the one.
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Test yourself
You've had 30 calm winning days with leverage, low vol, funding near zero. What is the right response?
- Leverage up, it's going great
- Leverage down, the calm is suspicious
- Change nothing, everything stays as is
Why is a perfectly smooth equity curve suspicious?
- Because it's too good to be true
- Because it can hide a delayed tail loss
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The key points at a glance
- Confidence is at its peak precisely on the day before the blow-up.
- A smooth, steadily rising equity curve can be a warning sign.
- Cut leverage when calm and self-assurance are at their highest.
Deep dive
Suppressed volatility: why calm is dangerous
The turkey is fed for 1000 days and is most confident on the day before Thanksgiving. Taleb: absence of evidence of harm is not evidence of the absence of harm.
Suppressed volatility builds up hidden tail risks. Like with wildfires: if you put out every small fire, you let the deadwood grow until the big fire destroys everything. Low vol and funding near zero are often the antechamber of the spike.
The smooth equity curve as a warning signal
A perfectly smooth curve feels like a seal of quality, but for some strategies it is the opposite. Martingale, grid without a stop, and averaging down against the trend produce exactly this picture, while the one big loss builds up invisibly.
Taleb calls it picking up pennies in front of a steamroller: earns pennies, loses dollars. On every suspiciously calm streak, ask where the tail loss that has not yet hit is hiding.
Turn leverage down when everything looks calm
The reflex is to raise leverage after 30 calm winning days. That is the most dangerous moment, because confidence is highest and the buffer is thinnest. The right response is the inverse.
- Reduce leverage when calm and self-confidence peak.
- Watch for unusually low realized volatility.
- Watch for funding rates that stay stuck near zero for days.
- Still cut size back during losing streaks.
Sources: Taleb
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