The Laws of Trading is a wonderful book on applied decision-making. Lebron extracts 11 laws from his trading career at Jane Street (one of the sharpest shops out there) and describes their importance for real-world decision-making, for example: the adverse selection that occurs in hiring, the liquidity risk that occurs in gym contracts, and the importance of incentive alignment in workplaces. I really liked an idea from Aaron Brown in the foreword: these “laws” are not laws in the sense of Newton’s Laws, rather they are Laws of the Jungle. They arise because of competition – “everything contrary to them no longer exists”.

The book is deceptively simple – 11 neat laws in plain English – but it is a deliberate simplicity that is evidently the result of deep philosophical thinking from the author, like the simple katana that takes years of expert craftsmanship to forge. There are many layers to each of the ideas. Even for the topics I thought I understood, perhaps especially for those topics, Lebron provided a new looking-glass.

Given that many of the ideas originate from trading, the reader would benefit from some prior interest in finance and trading; perhaps The Scout Mindset would be more suitable as a book on general decision-making. That said, I think that it’s often worth putting in the effort to learn enough context so that you can appreciate lessons from experienced practitioners – I am reminded of Atul Gawande’s books, sharing widely-applicable insights based on his time as a surgeon.

My only complaint about The Laws of Trading (and it’s a minor one) is that the structure can be hard to navigate: within the 11 laws, there are plenty of long deviations that seem to have (at least on the surface) little relation to the thrust of the chapter. But this qualm is perhaps unjustified because some of these tangents were the most interesting parts of the book. I particularly enjoyed the insights regarding the sociology of Bell Labs – the organisational factors that made it such a powerhouse of innovation.

There is a reason why plenty of traders highly recommend The Laws of Trading. This is probably a case where it doesn’t pay to be contrarian!

The Laws

Paraphrasing Aaron Brown: these laws are Laws of the Jungle, not Newton’s laws: they arise because of competition.

1. Motivation: Know why you are doing a trade before you trade
2. Adverse selection: You’re never happy with the amount you traded
3. Risk: Take only risks you’re being paid to take. Hedge the others
4. Liquidity: Put on risk using the most liquid instrument possible
5. Edge: Long term profitability of an edge is inversely proportional to its complexity
6. Models: The model expresses the edge
7. Costs and capacity: If you think your costs are negligible relative to edge, you're wrong about at least one of them
8. Possibility: Just because something has never happened doesn't mean it can't
9. Alignment: Working to align everyone's interests is time well spent
10. Technology: If you don't master technology and data, you're losing to someone who does
11. Adaptation: If you're not getting better, you're getting worse

Highlights

I read this in print and there were simply too many insights to transcribe – sorry!