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I don't think the cognitive bias you're describing matches this scenario very well, because that bias appears to result when people don't acknowledge specializa
by dsacco 9y ago
I don't think the cognitive bias you're describing matches this scenario very well, because that bias appears to result when people don't acknowledge specialization versus overall intelligence.
Your first example seems like it maps well to that cognitive bias - someone assumes that a chess grandmaster has catch-all capability because they demonstrated expertise in one area, and then they flare out in an orthogonal area.
Mathematics and engineering (at least, computer science) overlap in many areas. If someone excels at mathematics it doesn't prove that they'd be good at programming, but I'd bet a significant amount of money that the mean mathematics major is more capable of programming than the mean population in general. If that holds, there's no bias in trying to cross-pollinate expertise, even if it ultimately doesn't work out.
A lot of the work that occurs in finance is legitimate mathematics and has very close ties to physics. The heat equation is directly used in Black-Scholes; securities can be modeled as stochastic processes, which means that much of the models that apply to Brownian motion also apply to them. Outside of quantitative derivatives pricing (and more recently), hedge funds can apply the same scientific computing techniques used by physicists and computational biologists to analyze vast amounts of data (more than they know what to do with).
- computerex 9y agoAnd yet: http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/ http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/
- dsacco 9y ago1. That doesn't meaningfully respond to my point about cross pollinating skillsets, because we aren't distinguishing between amateurs, novices who become professionaks after expertise in other fields, and core professionals in finance/economics. 2. That bet is paraded more than it should be. Buffett bet against a "fund of funds", which is the aggregate performance of the industry. We didn't need a decade long bet to tell us most hedge funds are a poor return of capital, just as we don't need a bet to realize that the greatest n participants in many fields are mediocre. I would have gladly taken that bet with Buffett and won if I could have chosen a single firm. But Buffett wouldn't have taken that bet, because (to his credit) he understands this point already as a savvy investor. The bet proves that the industry overall is mediocre, but it says nothing about the top firms that mostly don't even take outside capital anymore because they're so successful.
- computerex 9y agoI was being cheeky when I responded to you. I agree with you on the first point. But I think you are downplaying the significance of the bet. If it was an obvious wash like you are making it seem then why was the bet even placed? What top firms are you talking about?
- dsacco 9y ago1. The bet was placed because Buffett's thesis is fundamentally true - you have much better odds of receiving a good return through passive index fund investing than you do through active management. However, this bet is often used (unempirically, though not necessarily strictly inaccurately) to justify the idea that active management cannot beat the market consistently. 2. Firms like Baupost or RenTec would have handily won that bet against Buffett. But like I said, Buffett wouldn't have made that bet, because Buffett is a smart better and already knows all of this. Buffett has never argued that the market is perfectly efficient and resistant to alpha harvesting; in fact, he has publicly taken the opposite position in letters to shareholders.