XIII. The definitions of “Long”XIV. Zen way of thinking about it:XV. Comparing long vs short volatilityXVI. InsightXVII. Derivative trading world: some rule of thumbsB) normal randomness also called Gaussian randomnessexample: adult male heightexample: all baseball statistics number of consecutive “heads” except their salariesexample: tons of coal per worker per dayexample: radioactive decay *C) randomness gone wildAlso called“wild”Cauchy non-GaussianMandelbrotian randomnessExamples:Frequency of words in English don’t use the word facet very oftenDistribution of wealth in a societyStock price changesWebsite hitsBook salesYouTube video views (proxy song sales)What happens:Market place for bands to sell their songs and this called the music businessArtists selling songs to consumers but most of the time artists don’t have the resourcesLabels/publishers/distributors other intermediaries when artists sell their songs and recordings the labels and publishers know that there will be wild variation and long shotsEssentially those in the middle are buying low and selling high to the consumerVery structure of the market place helps the intermediaries become profitable(secret reason #1)D) LongTail/LongVolatility Strategy•THE BLEED: many small “bets” that rarely pay out.•WILDNESS: payouts or "upside" must be virtually unlimited. Payouts must exhibit a "wild" variation. Payouts more than make up for all the small losses.•LOW OVERHEAD: “bets” are inexpensive or acquired free in the course of other activities.“harvesting luck”E) The definitions of “Long”1) 2 ways to use itTraders say “long” when they own something or will profit if that underlying something goes up in value.It is also used in non technical ways. “I’m long the White Sox this year”. (they just want white sox songs)I’m long Gibson SG guitars. (actually heard this from a trader/vintage guitar dealer. and come to think of it he used it in the technically correct way).2) In the options trading world being long volatility means you have a limited loss potential or “downside”. But an unlimited profit potential or “upside”. Youre making money when the stocks move aroundMake money when volatile things happenSongs are failuresUnexpected event is a hit-that’s volatility happeningAuthors amazon single book sales-demand increases, profit increasesOn Average and Over the Longterm To be profitable or “successful” In the Music Business you must be “Long Volatility” or have an unlimited Profit Potential.The greater the demand the greater the profit.Why? Because you want to capture the majority of the profits and the majority of the profits are in the random hitsEntities: record labels, publishers, song writers, recording artistsIndirectly: managers and business managers paid a percentage of grossAll have unlimited potential “upside” from owning songs or recordings. And that upside is of a wild variety. (cause recorded music revenues exhibit wild variation)F) Zen way of thinking about it:long volatility: you profit if things change beyond expectationsshort volatility: you profit when things stay within the range of expectationsbetting on what she expects a artists to sellconcert tickets are short volatilityG) Comparing long vs short volatilityShort: engineers hourly rate, record executives, tour manager, road crew, entertainment lawyers, concert promoters, music venues, accountants hourlyLong: song writers, sales, record labels, publishing companies, record producers, mix engineersTalent is NOT overrated in short volatility, talent is dominated by short volatilityYou’re going to have to work a short volatility job first then move to long volatilityH) InsightLong Volatility traders are the record companies, publishing companies, songwriters and others with unlimited upside.Short volatility traders are concert promoters and others with a limited upside.When you do this it appears that what is true for long volatility positions in the derivatives world is true for long volatility positions in the music business.And what is true for short volatility positions in the derivatives world appears to be true for short volatility positions in the music business.There is nothing magic about this. It’s related to how risk and reward are “priced”. Turns out to be the same in both businesses.I) Derivative trading world: some rule of thumbsFolk wisdom from the art of volatility trading.Long volatility positions tend to not “blow up”. They don’t go out of business. You don’t lose all their moneyShort Volatility positions tend to “blow up” or go out of business. (night clubs are long volatility and tend to go out of business and sold to the next sucker).Long Volatility positions lose a little money most of the time. But make so much money on their winnings it more than makes up for their losses. (think record labels or songwriters)Short Volatility positions make money most of the time. When they lose they tend to wipe out all their previous winnings. (concert promoters this is case).Key thing: Certainty is usually overpriced. Uncertainty is usually underpriced.When betting on shows you’re betting on certaintyBut certainty is overpricedLong Volatility positions rely more on luck to make money.Short Volatility positions require more skill. (and a little fancy cooking of the books, more on this later)Pay fees on concert ticket, promoters are making money on this stuffThe long in “Long Tail” means just what it should. The length of the tail. more on this later.The most popular stuff is in the head and the less popular stuff is in the tailMBUS 3000 1st Edition Lecture 10 Outline of Last Lecture I. Death of the recorded music business II. Bain chartIII. Digital Age IV. Singles V. Free pirated music VI. From an artists perspective VII. Record labels VIII. Some random points Outline of Current Lecture IX. Secret reason #1 X. normal randomness also called Gaussian randomnessXI. randomness gone wildXII. LongTail/LongVolatility StrategyXIII. The definitions of “Long”XIV. Zen way of thinking about it: XV. Comparing long vs short volatility XVI. InsightXVII. Derivative trading world: some rule of thumbsCurrent LectureA) Secret reason #1These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- record labels/publishers are profitable: The variation in revenue from