Tuesday, January 12, 2016

Complexity: False Promises

The relative complexity of quantitative research methods can make a trader think he's smarter than the market. But developing some intricate strategy he needs not to be smarter than the market, he needs to be smarter than his peers.

Quantitative data are available to everyone, quantitative methods are known to everyone, the reasonable assumption is that whatever the researcher has found is already not a news. The assumption that you are the first is very appealing but is not conservative enough to be safe. If you could found it, everyone who cared enough could found it. There may be already tons of millions of dollars on their way to fill that opportunity field and close - or even revert - that market feature.

It is not enough to know what worked. The most important question is not "what worked?". Question yourself: "now, when everyone - even me - knows about it, why it will persist?" You'd better have a good answer.

Making assumptions of being a genius is the surest way to lose money betting against the market. This leads to overconfidence, then to overleverage and, in the end, the whole advantage of being quantitative can be lost.

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