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> By referring to "future returns", he went beyond any rational position, and he directly contradicts the position taken by the SEC on this issue. You asked fo

> By referring to "future returns", he went beyond any rational position, and he directly contradicts the position taken by the SEC on this issue. You asked for an example of a strategy which could reliably beat the market. I offered up the example of the fund I work for. Do you really think that this is me being a salesman? Here are "the facts": 1. I am not, nor have I ever been, employed in sales. I work in research. I have zero client contact. 2. If I did want to raise investment for the fund, I wouldn't come to an obscure discussion thread on Hacker News to do it. Apart from anything else, most people can't afford the minimum investment. 3. It's an SEC requirement to include something like "past performance does not guarantee future results" on advertisements for mutual funds (NB this isn't an advertisement, and I work for a hedge fund, not a mutual fund). Strictly speaking that's true - nothing guarantees future results. But let's be Bayesian about it - would you rather put your money in the hands of a manager who's returned -10% for the last five years, or one who's returned +10%? [0] Finally, if you think it's a waste of time talking to me, you presumably think it's a waste of time talking to anyone who works for a hedge fund (or any other kind of fund). What you're saying is "The opinions of those who have the most experience on this issue, who spend 60+ hours a week thinking about this, and who put their own reputation and investments on the line daily -- those opinions are the ones least worth listening to." I appreciate your point about conflict of interest. It's true that if everyone believed in the EMH, I wouldn't have the job I do now. But to summarily discard the point of view of everyone who works in finance seems a little bizarre. It's as if I said that it's not worth talking to software developers about programming, since if no one believed it was worth buying software, they wouldn't have a job. [0]It's a trick question. If you believe in the EMH, your prior on the expected excess return on any strategy is 0% (or slightly negative to account for trading costs) and no amount of data will change that. You should be perfectly indifferent to these two money managers. But are you? What if they had 20 years of history? What if they had 100 years? At what point do you start to revise your opinion about the EMH?

lutusp 14y ago
> You asked for an example of a strategy which could reliably beat the market. I never said any such thing. I asked for scientific evidence that the EMH is false. There is no scientific evidence that the EMH is false -- none whatsoever. A single data point is not science. Your experience is not science. Your claim about future performance is certainly not science. TO have scientific value, it must be weighed against the entire population of stockbrokers. > What you're saying is "The opinions of those who have the most experience on this issue, who spend 60+ hours a week thinking about this, and who put their own reputation and investments on the line daily -- those opinions are the ones least worth listening to." That is exactly right -- every word. People who are closest to this issue, who have a vested interest in a given outlook, are the least reliable sources of evidence. And this is Science 101. Do we ask murderers their opinions on sentencing guidelines? No, we don't -- their views aren't objective. By the same token, we don't ask stockbrokers their opinions on the theoretical underpinnings of the EMH, for the same reason -- their views aren't objective. Your position is common among people who don't understand science -- "There is a theory that the equities market cannot be played, that the average return, reflected for example in the DJIA, cannot be improved on in the long term and over all investors and funds. But my experience disproves it -- I work for a fund that is at the right-hand side of the standard distribution, therefore the EMH is false." This is laughably absurd. No one who understand statistics or science can miss the fundamental logical error you're making. I wonder -- do you by chance live in Lake Wobegon, where all the children are above average? > At what point do you start to revise your opinion about the EMH? First, it's not an opinion, it's based on scientific evidence. Second, it would be easy to disprove the EMH in principle, and may have tried but failed. Are you not aware of the Wall Street Journal Dartboard Contest? It is an excellent example of a pragmatic "put up or shut up" challenge to stockbrokers such as yourself, and it shows that there is no basis for the claim that managed accounts are worth their costs, or that the EMH is false. > But to summarily discard the point of view of everyone who works in finance seems a little bizarre. First, the views of individuals must be discarded, for reasons that should be obvious. Second, the experience of all stockbrokers as a population is the only rational basis for objective scientific evidence. Also, if the point is to find out which outcome is true in a study of human behavior, the least reliable source of evidence are the opinions of individuals who practice what's being studied. One would instead examine the actual outcomes, not the views of those outcomes expressed by the practitioners. Let me spell this out for you. In science, your personal experience means precisely nothing. In science the average experience of all people in your position might lead to a useful result, depending on how careful the data was collected and processed. Case in point. J. B. Rhine of Duke University believed he had uncovered evidence of ESP -- not because of a single data point, but because of many experiments over years. His data showed a persistent, small bias in favor of the precognition idea. After Rhine passed on, others examined his records and discovered that he had been systematically dropping certain experimental outcomes, on the ground that they were so bad that they couldn't possibly be valid. In other words, Rhine didn't understand statistics, in which, given sufficient trial runs, an occasional very bad result is likely. The excluded results were reinstated, and Rhine's ESP claim evaporated. True story. Now, you are saying that your personal experience disproves the EMH, or deserves to be counted as evidence against the EMH. But you are wrong -- this is not how science works. If all people in your position experienced the same thing, that would be a different story, but as is well-established, the average performance of stockbrokers is average, not exceptional (the dartboard contest proved that). > It's as if I said that it's not worth talking to software developers about programming ... But that's true! If the point is to discover how many lines of code contain bugs, the last people you would want to ask are those who wrote the code. You would instead work out an objective and preferably automated way to detect bugs, to avoid the trap of depending on the opinions of people in a given line of work. In study after study, 80% of drivers think they're above average, 94% of college professors, and so forth. It's mass delusion, and it's why human studies have to be performed so carefully. Title: "94% of College Professors are above average" Link: http://healthcare-economist.com/2008/04/11/94-of-college-professors-are-above-average/ http://healthcare-economist.com/2008/04/11/94-of-college-pro... Given the above well-established bias, the Wall Street Journal Dartboard Contest was meant to avoid asking stockbrokers what they thought, and gather evidence in a more objective way -- by comparing stockbroker performance against a randomly chosen pick of stocks. The dartboard's outcome was roughly equal to that of the brokers (within experimental error bounds), which means people who pay brokerage fees are being cheated. http://online.wsj.com/article/SB10000872396390444024204578044390473058954.html http://online.wsj.com/article/SB1000087239639044402420457804... Quote: "The darts [i.e. random picks] have historically beaten the readers [i.e. brokers], with 28 wins out of 47 contests." Welcome to reality.

lutusp 14y ago

> You asked for an example of a strategy which could reliably beat the market. I never said any such thing. I asked for scientific evidence that the EMH is false. There is no scientific evidence that the EMH is false -- none whatsoever. A single data point is not science. Your experience is not science. Your claim about future performance is certainly not science. TO have scientific value, it must be weighed against the entire population of stockbrokers. > What you're saying is "The opinions of those who have the most experience on this issue, who spend 60+ hours a week thinking about this, and who put their own reputation and investments on the line daily -- those opinions are the ones least worth listening to." That is exactly right -- every word. People who are closest to this issue, who have a vested interest in a given outlook, are the least reliable sources of evidence. And this is Science 101. Do we ask murderers their opinions on sentencing guidelines? No, we don't -- their views aren't objective. By the same token, we don't ask stockbrokers their opinions on the theoretical underpinnings of the EMH, for the same reason -- their views aren't objective. Your position is common among people who don't understand science -- "There is a theory that the equities market cannot be played, that the average return, reflected for example in the DJIA, cannot be improved on in the long term and over all investors and funds. But my experience disproves it -- I work for a fund that is at the right-hand side of the standard distribution, therefore the EMH is false." This is laughably absurd. No one who understand statistics or science can miss the fundamental logical error you're making. I wonder -- do you by chance live in Lake Wobegon, where all the children are above average? > At what point do you start to revise your opinion about the EMH? First, it's not an opinion, it's based on scientific evidence. Second, it would be easy to disprove the EMH in principle, and may have tried but failed. Are you not aware of the Wall Street Journal Dartboard Contest? It is an excellent example of a pragmatic "put up or shut up" challenge to stockbrokers such as yourself, and it shows that there is no basis for the claim that managed accounts are worth their costs, or that the EMH is false. > But to summarily discard the point of view of everyone who works in finance seems a little bizarre. First, the views of individuals must be discarded, for reasons that should be obvious. Second, the experience of all stockbrokers as a population is the only rational basis for objective scientific evidence. Also, if the point is to find out which outcome is true in a study of human behavior, the least reliable source of evidence are the opinions of individuals who practice what's being studied. One would instead examine the actual outcomes, not the views of those outcomes expressed by the practitioners. Let me spell this out for you. In science, your personal experience means precisely nothing. In science the average experience of all people in your position might lead to a useful result, depending on how careful the data was collected and processed. Case in point. J. B. Rhine of Duke University believed he had uncovered evidence of ESP -- not because of a single data point, but because of many experiments over years. His data showed a persistent, small bias in favor of the precognition idea. After Rhine passed on, others examined his records and discovered that he had been systematically dropping certain experimental outcomes, on the ground that they were so bad that they couldn't possibly be valid. In other words, Rhine didn't understand statistics, in which, given sufficient trial runs, an occasional very bad result is likely. The excluded results were reinstated, and Rhine's ESP claim evaporated. True story. Now, you are saying that your personal experience disproves the EMH, or deserves to be counted as evidence against the EMH. But you are wrong -- this is not how science works. If all people in your position experienced the same thing, that would be a different story, but as is well-established, the average performance of stockbrokers is average, not exceptional (the dartboard contest proved that). > It's as if I said that it's not worth talking to software developers about programming ... But that's true! If the point is to discover how many lines of code contain bugs, the last people you would want to ask are those who wrote the code. You would instead work out an objective and preferably automated way to detect bugs, to avoid the trap of depending on the opinions of people in a given line of work. In study after study, 80% of drivers think they're above average, 94% of college professors, and so forth. It's mass delusion, and it's why human studies have to be performed so carefully. Title: "94% of College Professors are above average" Link: http://healthcare-economist.com/2008/04/11/94-of-college-professors-are-above-average/ http://healthcare-economist.com/2008/04/11/94-of-college-pro... Given the above well-established bias, the Wall Street Journal Dartboard Contest was meant to avoid asking stockbrokers what they thought, and gather evidence in a more objective way -- by comparing stockbroker performance against a randomly chosen pick of stocks. The dartboard's outcome was roughly equal to that of the brokers (within experimental error bounds), which means people who pay brokerage fees are being cheated. http://online.wsj.com/article/SB10000872396390444024204578044390473058954.html http://online.wsj.com/article/SB1000087239639044402420457804... Quote: "The darts [i.e. random picks] have historically beaten the readers [i.e. brokers], with 28 wins out of 47 contests." Welcome to reality.