3 ms·

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 ef

by 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
  The excuse you gave for Buffet's long term success was that legions of others copy his investments and they become self fulfilling prophecies. But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? What will you if they do it again this year? (and I dont think anyone claims they've been playing by a single strategy all this time)
  - lutusp 14y ago
    > But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? It is always possible to pick and choose your data to prove any point you care to make. But the fund you describe is one data point in a large distribution of investors and funds defined by the market averages. Please try to evaluate this scientifically, dispassionately. > ... What are the odds ... The odds are excellent that, in a field of tens of thousands of funds, a few of them will do spectacularly well because of chance factors. And this is the explanation favored by Occam's razor -- the idea that the simplest explanation is likely to be the correct one. In a computer analysis described here -- http://www.arachnoid.com/randomness/#Investment_Genius http://www.arachnoid.com/randomness/#Investment_Genius -- a model is set up with 100,000 investors, each of whom randomly buys and sells stocks, in a market that creeps up in value over time (like the real market) along with random fluctuations (like the real market). "What are the odds" for success because of chance? Very good -- essentially certain. Of the 100,000 investors with managed portfolios, each with an initial $10,000 stake, 224 became millionaires by chance alone. The top-earning portfolio returns $4,638,235.88 by chance alone. But at the same time, the average investor with a managed portfolio (who wasn't a buy & hold investor) came out behind -- more than 2/3 of the managed portfolios come out behind the market average. And this model didn't even assess trading fees -- a more realistic model that charges transaction fees makes active portfolios look much worse. Imagine you're a stockbroker and you know these facts, facts that put an active portfolio in such a bad light. What do you tell your clients? That having an actively traded portfolio is a losing proposition? Or that a handful of investors came out ahead, some far ahead? The bottom line is that a successful fund, especially one that won't reveal its methods, is the result of chance -- absent scientific evidence that something other than chance is involved. Imagine that someone throws a fair coin and eventually produces a series of 16 heads in a row. Doesn't that prove that the thrower has psychokinetic powers? No, it means he threw the coin 2^16 (65,536) times, a sequence during which the described outcome has a 50% chance to arise by chance alone. Also read this: http://www.arachnoid.com/randomness/#Miracle_Man http://www.arachnoid.com/randomness/#Miracle_Man In the above strategy, a con man mails you a series of predictions so remarkable that you're certain he's a genius, but the strategy is so absolutely predictable (and easily explained) that it can be carried out with a computer and as printer with no human intervention. So in answer to your question "what are the odds?", I have to say that all these outcomes are easily explained as chance occurrences, and that is by far the most likely explanation.

by Tycho 14y ago

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
The excuse you gave for Buffet's long term success was that legions of others copy his investments and they become self fulfilling prophecies. But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? What will you if they do it again this year? (and I dont think anyone claims they've been playing by a single strategy all this time)
- lutusp 14y ago
  > But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? It is always possible to pick and choose your data to prove any point you care to make. But the fund you describe is one data point in a large distribution of investors and funds defined by the market averages. Please try to evaluate this scientifically, dispassionately. > ... What are the odds ... The odds are excellent that, in a field of tens of thousands of funds, a few of them will do spectacularly well because of chance factors. And this is the explanation favored by Occam's razor -- the idea that the simplest explanation is likely to be the correct one. In a computer analysis described here -- http://www.arachnoid.com/randomness/#Investment_Genius http://www.arachnoid.com/randomness/#Investment_Genius -- a model is set up with 100,000 investors, each of whom randomly buys and sells stocks, in a market that creeps up in value over time (like the real market) along with random fluctuations (like the real market). "What are the odds" for success because of chance? Very good -- essentially certain. Of the 100,000 investors with managed portfolios, each with an initial $10,000 stake, 224 became millionaires by chance alone. The top-earning portfolio returns $4,638,235.88 by chance alone. But at the same time, the average investor with a managed portfolio (who wasn't a buy & hold investor) came out behind -- more than 2/3 of the managed portfolios come out behind the market average. And this model didn't even assess trading fees -- a more realistic model that charges transaction fees makes active portfolios look much worse. Imagine you're a stockbroker and you know these facts, facts that put an active portfolio in such a bad light. What do you tell your clients? That having an actively traded portfolio is a losing proposition? Or that a handful of investors came out ahead, some far ahead? The bottom line is that a successful fund, especially one that won't reveal its methods, is the result of chance -- absent scientific evidence that something other than chance is involved. Imagine that someone throws a fair coin and eventually produces a series of 16 heads in a row. Doesn't that prove that the thrower has psychokinetic powers? No, it means he threw the coin 2^16 (65,536) times, a sequence during which the described outcome has a 50% chance to arise by chance alone. Also read this: http://www.arachnoid.com/randomness/#Miracle_Man http://www.arachnoid.com/randomness/#Miracle_Man In the above strategy, a con man mails you a series of predictions so remarkable that you're certain he's a genius, but the strategy is so absolutely predictable (and easily explained) that it can be carried out with a computer and as printer with no human intervention. So in answer to your question "what are the odds?", I have to say that all these outcomes are easily explained as chance occurrences, and that is by far the most likely explanation.