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You are falling into the curve fitting trap that is epidemic in economics. This is typically what economic "scientists" do, they find a formula that fits a lot
by socrates1998 13y ago
You are falling into the curve fitting trap that is epidemic in economics.
This is typically what economic "scientists" do, they find a formula that fits a lot of past data, then they publish it as science.
If they actually used it to make money, then it would be better, but that is almost never the case.
People who make money in the financial markets don't publish their winning formulas.
Why? For two reasons.
1) It probably isn't a hard rule or formula. It is probably a combination of factors that go into a decision that ultimately becomes a "gut feeling". Then, the best traders, usually get out if the trade doesn't work right away. This is because something unknown is acting on the trade, and since they have no idea what it is, they get out.
2) They want to use the formula to continue to make money, and since financial markets are very dynamic, they formula might not work if a bunch of people start using it.
- crntaylor 13y agoBelieve me, I am more than aware of the perils of overfitting! The purpose of my comment isn't to say that using Shiller's P/E ratio is a good way to make money. In fact, I'm essentially saying the opposite - that while I think the research is good, it would be an inappropriate tool for most individual investors, because of the length of the required time horizon, and the length and magnitude of the drawdowns you'd have to endure. As an aside, I believe that your criticisms of economics are misplaced. Certainly there is plenty of poor research and curve-fitting that gets published in journals of economics. But there are also extremely capable economists whose understanding of data-mining bias and overfitting is far in advance of yours or mine, and who are extremely careful when evaluating models using historical data.
- Misterburns 13y agoYour statements about scientists are an overfit. Randomized controlled trials: http://m.newyorker.com/reporting/2010/05/17/100517fa_fact_parker http://m.newyorker.com/reporting/2010/05/17/100517fa_fact_pa...
- zmk_ 13y agoInsiders publish a sizable chunk of research. Not the currently winning formulas but something that stopped working or is too general a theory to be easily applied. E.g. for hedge funds this is one of the very few ways they can advertise to investors.