4 ms·

If you were an investor in 1985 and you did this analysis and ran out-of-sample tests, you would have 15 years of profitability before the algorithm starts gene

If you were an investor in 1985 and you did this analysis and ran out-of-sample tests, you would have 15 years of profitability before the algorithm starts generating losses. After a few months of losses you would discard the algorithm and search for a new one. What am I missing?

lintiness 11y ago
why would you imagine a few months or losses indicated the strategy didn't work anymore?
- p4wnc6 11y ago
  Exactly. This is a form of counterfactual bias. It's easy to imagine how you were "almost right" and give yourself credit for that, but it's much harder to imagine when you were "almost wrong" and correctly penalize your thinking in proportion to the almost-wrong-ness. It's easy to imagine you would have turned off the strategy at a convenient time, but it's hard to imagine that you would maybe rationalize that it's just a short slump or something and keep the strategy going. And for any hard rule you make like a priori committing to turning off some strategy if there are X consecutive months of bad returns (for reasonably small X), you can construct some counter-example strategy where, if you had just had the foresight to hold on to month X+1, you would have made a ton of money and there was some after-the-fact obvious reason why months 1 through X had the poor return, and "smart" investors would have understood this and...
- canttestthis 11y ago
  Because the strategy was almost consistently profitable before 2000. So if I entered the algorithm with the assumption that x months of no profit = shut it down, or y% loss = shut it down, I wouldn't be sitting there watching my investment go down 71%.
- lordnacho 11y ago
  As someone who worked at a shop where this actually happened, I can confirm the strategy most likely would not be shut down. In fact it ended up being run sideways for longer than it made money. Naturally this is due to the manager really depending on the income from having the assets.

lintiness 11y ago

why would you imagine a few months or losses indicated the strategy didn't work anymore?

p4wnc6 11y ago
Exactly. This is a form of counterfactual bias. It's easy to imagine how you were "almost right" and give yourself credit for that, but it's much harder to imagine when you were "almost wrong" and correctly penalize your thinking in proportion to the almost-wrong-ness. It's easy to imagine you would have turned off the strategy at a convenient time, but it's hard to imagine that you would maybe rationalize that it's just a short slump or something and keep the strategy going. And for any hard rule you make like a priori committing to turning off some strategy if there are X consecutive months of bad returns (for reasonably small X), you can construct some counter-example strategy where, if you had just had the foresight to hold on to month X+1, you would have made a ton of money and there was some after-the-fact obvious reason why months 1 through X had the poor return, and "smart" investors would have understood this and...
canttestthis 11y ago
Because the strategy was almost consistently profitable before 2000. So if I entered the algorithm with the assumption that x months of no profit = shut it down, or y% loss = shut it down, I wouldn't be sitting there watching my investment go down 71%.
lordnacho 11y ago
As someone who worked at a shop where this actually happened, I can confirm the strategy most likely would not be shut down. In fact it ended up being run sideways for longer than it made money. Naturally this is due to the manager really depending on the income from having the assets.