4 ms·

A quote: "And at least some physicists have been phenomenally successful as fund managers. Indeed, the fund that is widely viewed as the most successful hedge f

by lutusp 14y ago

A quote: "And at least some physicists have been phenomenally successful as fund managers. Indeed, the fund that is widely viewed as the most successful hedge fund of all time, the Medallion Fund, was run for twenty years by mathematical physicist James Simons–the same James Simons who lent his name to Chern-Simons theory, which has been studied extensively by string theorists." When are financial sector writers going to stop assuming that a chance success in finance is in any way the result of specific training or background on the part of a fund manager? One of two things is true -- either the Efficient Market Hypothesis (EMH) is true, in which case who you are doesn't matter, or the EMH is false, in which case anyone can make bazillions in the markets by simply applying the kinds of "sure-fire winning strategies" that are touted in any number of worthless investment best-sellers. All the evidence suggests that the EMH is true, that markets are unpredictable, and all successes are chance successes. The Wall Street Journal "Dartboard Contest" supports this idea, to the chagrin of any number of stockbrokers and analysts, who would prefer it if there were any credible evidence that their services have value. http://whyfiles.org/037wall_st/predict.html http://whyfiles.org/037wall_st/predict.html

yarou 14y ago
>A quote: "And at least some physicists have been phenomenally successful as fund managers. Indeed, the fund that is widely viewed as the most successful hedge fund of all time, the Medallion Fund, was run for twenty years by mathematical physicist James Simons–the same James Simons who lent his name to Chern-Simons theory, which has been studied extensively by string theorists." P Quant math is relatively easy to grasp, so much so that an undergraduate with some statistics and calculus background can understand it quite easily. >All the evidence suggests that the EMH is true, that markets are unpredictable, and all successes are chance successes. Markets are unpredictable, but people (read: rational, utility-maximizing investors) aren't. Generally there is a level of herd behavior that can be modeled.
- lutusp 14y ago
  > Markets are unpredictable, but people (read: rational, utility-maximizing investors) aren't. Generally there is a level of herd behavior that can be modeled. You're overlooking the fact that some of those modeled people are analysts who are also trying to model, and act on, the behavior of the mob. In fact, analysts constitute their own mob. :) That restores the EMH to its rightful place.
  - iskander 14y ago
    A recursive process with chaotic feedback cycles certainly won't be predictable but I also don't know under what model it's efficient either.
    - lutusp 14y ago
      > A recursive process with chaotic feedback cycles certainly won't be predictable ... Not so -- chaotic systems are predictable, if one understands the system. Using "chaotic feedback" as an argument isn't particularly instructive, given that chaos theory is a study of predictable systems that happen to be extraordinary sensitive to initial conditions. > I also don't know under what model it's efficient either. Of course such a system is efficient, if by "efficient" we mean that it doesn't violate physical laws. For example, there are any number of chaotic systems in nature, but all of them conserve energy and angular momentum (among other things). That tells us that such a system is difficult to read, but entirely obedient.
      - iskander 14y ago
        >chaotic systems are predictable Sprinkle in any measurement uncertainty and you no longer know the initial conditions. Hence, real world chaotic systems are unpredictable. >by "efficient" we mean that it doesn't violate physical laws. So...an inefficient market is one in which all the participants are time travelers?
        lutusp 14y ago
        > Sprinkle in any measurement uncertainty and you no longer know the initial conditions. Hence, real world chaotic systems are unpredictable. Which part of your answer replies to my statement? Chaotic systems are predictable. All one needs are the initial conditions. Circle the word you didn't understand and raise your hand. Nothing is more common than an organization which exploits public ignorance of the innate predictability of complex systems.
Tycho 14y ago
One of the arguments which the author makes is that if the EMH is true, and returns follow an essentially random walk, somebody still has to act to make them efficient. A price doesn't reflect all known information about an asset if the people who have that information don't bid. Companies like Simon's Renaissance Technologies employ modelling techniques first developed by physicists studying chaotic systems. They try to squeeze just enough information about the structure of the market in a given moment to place a winning short term bet. The fact that Simon's Medallion Fund is the most successful hedge fund in history, only employs physicists and mathematicians, and has been successful over a period of 25 years, suggests rather strongly that it's not just chance and probably is related to training in other fields...
- lutusp 14y ago
  > The fact that Simon's Medallion Fund is the most successful hedge fund in history, only employs physicists and mathematicians, and has been successful over a period of 25 years, suggests rather strongly that it's not just chance and probably is related to training in other fields... The market consists of players that lie on a standard distribution, with the market averages identifying the mean. Now ask yourself -- how many players will be above the average on a given day? And how many of those "winners" will be predisposed to acknowledge the role of chance in that outcome? Because of chance factors, some investors will become multimillionaires by chance alone. Because of chance factors, some funds will outperform the market averages for decades running. But without a proper scientific analysis, none of this means anything apart from randomness. I cannot tell you how many times I've heard the same claim -- "(name a fund) consistently outperforms the market norms, therefore ..." Therefore nothing. Therefore the dice fell in an interesting bur meaningless way. Also, a point obviously lost on you, if the fund you describe really has a winning strategy, why is it not formalized and published? There are two possible answers: (a) it is not a system, it is a series of lucky guesses, or (b) it is a system, but they won't publish it and lose its advantage. Neither answer raises this above the default assumption suggested by Occam's razor -- it's a chance correlation. Science requires evidence, not anecdotes, and the plural of anecdote is not evidence.
  - Tycho 14y ago

by lutusp 14y ago

yarou 14y ago

>A quote: "And at least some physicists have been phenomenally successful as fund managers. Indeed, the fund that is widely viewed as the most successful hedge fund of all time, the Medallion Fund, was run for twenty years by mathematical physicist James Simons–the same James Simons who lent his name to Chern-Simons theory, which has been studied extensively by string theorists." P Quant math is relatively easy to grasp, so much so that an undergraduate with some statistics and calculus background can understand it quite easily. >All the evidence suggests that the EMH is true, that markets are unpredictable, and all successes are chance successes. Markets are unpredictable, but people (read: rational, utility-maximizing investors) aren't. Generally there is a level of herd behavior that can be modeled.

lutusp 14y ago
> Markets are unpredictable, but people (read: rational, utility-maximizing investors) aren't. Generally there is a level of herd behavior that can be modeled. You're overlooking the fact that some of those modeled people are analysts who are also trying to model, and act on, the behavior of the mob. In fact, analysts constitute their own mob. :) That restores the EMH to its rightful place.
- iskander 14y ago
  A recursive process with chaotic feedback cycles certainly won't be predictable but I also don't know under what model it's efficient either.
  - lutusp 14y ago
    > A recursive process with chaotic feedback cycles certainly won't be predictable ... Not so -- chaotic systems are predictable, if one understands the system. Using "chaotic feedback" as an argument isn't particularly instructive, given that chaos theory is a study of predictable systems that happen to be extraordinary sensitive to initial conditions. > I also don't know under what model it's efficient either. Of course such a system is efficient, if by "efficient" we mean that it doesn't violate physical laws. For example, there are any number of chaotic systems in nature, but all of them conserve energy and angular momentum (among other things). That tells us that such a system is difficult to read, but entirely obedient.
    - iskander 14y ago
      >chaotic systems are predictable Sprinkle in any measurement uncertainty and you no longer know the initial conditions. Hence, real world chaotic systems are unpredictable. >by "efficient" we mean that it doesn't violate physical laws. So...an inefficient market is one in which all the participants are time travelers?
      - lutusp 14y ago
        > Sprinkle in any measurement uncertainty and you no longer know the initial conditions. Hence, real world chaotic systems are unpredictable. Which part of your answer replies to my statement? Chaotic systems are predictable. All one needs are the initial conditions. Circle the word you didn't understand and raise your hand. Nothing is more common than an organization which exploits public ignorance of the innate predictability of complex systems.

Tycho 14y ago

One of the arguments which the author makes is that if the EMH is true, and returns follow an essentially random walk, somebody still has to act to make them efficient. A price doesn't reflect all known information about an asset if the people who have that information don't bid. Companies like Simon's Renaissance Technologies employ modelling techniques first developed by physicists studying chaotic systems. They try to squeeze just enough information about the structure of the market in a given moment to place a winning short term bet. The fact that Simon's Medallion Fund is the most successful hedge fund in history, only employs physicists and mathematicians, and has been successful over a period of 25 years, suggests rather strongly that it's not just chance and probably is related to training in other fields...

lutusp 14y ago
> The fact that Simon's Medallion Fund is the most successful hedge fund in history, only employs physicists and mathematicians, and has been successful over a period of 25 years, suggests rather strongly that it's not just chance and probably is related to training in other fields... The market consists of players that lie on a standard distribution, with the market averages identifying the mean. Now ask yourself -- how many players will be above the average on a given day? And how many of those "winners" will be predisposed to acknowledge the role of chance in that outcome? Because of chance factors, some investors will become multimillionaires by chance alone. Because of chance factors, some funds will outperform the market averages for decades running. But without a proper scientific analysis, none of this means anything apart from randomness. I cannot tell you how many times I've heard the same claim -- "(name a fund) consistently outperforms the market norms, therefore ..." Therefore nothing. Therefore the dice fell in an interesting bur meaningless way. Also, a point obviously lost on you, if the fund you describe really has a winning strategy, why is it not formalized and published? There are two possible answers: (a) it is not a system, it is a series of lucky guesses, or (b) it is a system, but they won't publish it and lose its advantage. Neither answer raises this above the default assumption suggested by Occam's razor -- it's a chance correlation. Science requires evidence, not anecdotes, and the plural of anecdote is not evidence.
- Tycho 14y ago