SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Why is financial research useless?

September 26th, 2014, 12:40 pm

QuoteOriginally posted by: GamalThere are some downsides of prediction:1. Unlike pricing and risk management it's not scientific - there're no rules that everybody may learn: if there're winners, there must be loosers.2. You make money with good predictions, so you don't publish them - publishing good predictions is just giving away money. You may be hence sure that all published predictions are wrong.3. Maybe best brains in finance work on predictions, maybe not, but one thing is sure - they are solitary and all start from the very begining. As Jim Simons states - all trades are separated, there're tricks but not rules. There's no giants to stand on their shoulders. BTW - how to tell a good brain from a worse one? By brain teasers? So you may find best brains in brain teasers, nothing more. Good in making money is only someone who makes money, that's all. John Meriwether was until until...There's a central flaw and a paradox in what you said.If someone publishes a prediction method and (almost) no one believes it to be true, then that method will continue to make money for it's few believers. Ironically, the most unbelievable predictions may be the ones most likely to be true! It's only when enough people (or people with enough capital) believe and use a prediction method that it becomes falsified. In essence, widespread belief in your statement #2 makes your statement #2 false (and vice versa).Prediction can be scientific as long as the system boundary encompasses all of the elements that actually affect the predicted outcomes. Prediction methods that focus on prices as statistical closed-systems are deeply flawed from the reasons that you state but prediction methods that focus on the predictors may be more likely to work. Although a given prediction algorithm may have limited life due to the dynamics of your rule #2, the lifespan of prediction meta-algorithms can be much longer.Finally, there is a persistent class of winners in the system -- those that create the appearance of opportunities to win and attract people to "the game". The ecosystem of pundits, tool makers, brokers, and market makers seems to thrive day in, day out.
Last edited by Traden4Alpha on September 25th, 2014, 10:00 pm, edited 1 time in total.
 
User avatar
Gamal
Topic Author
Posts: 2362
Joined: February 26th, 2004, 8:41 am

Why is financial research useless?

September 26th, 2014, 12:45 pm

QuoteOriginally posted by: Traden4AlphaFinally, there is a persistent class of winners in the system.John Meriwether for instance. Until, until...
 
User avatar
DominicConnor
Posts: 11684
Joined: July 14th, 2002, 3:00 am

Why is financial research useless?

September 26th, 2014, 1:07 pm

I wonder if this is specific to finance ?If you look at the sheer number of people paid to do research in all fields and the rate at which each one is obliged to produce papers for publication, then divide by the number of things they work out that anyone could possibly care about then it's not suprising that most isn't useful.
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Why is financial research useless?

September 26th, 2014, 1:23 pm

QuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4AlphaFinally, there is a persistent class of winners in the system.John Meriwether for instance. Until, until... Meriwether lost by trying to predict winners. He's not a member of the class that I was talking about. The class of persistent winners thrive not by predicting which investments will win but by predicting that there will always be people trying to predict which investments will win. People are far less stochastic than prices!
 
User avatar
rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

Why is financial research useless?

September 26th, 2014, 2:32 pm

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4AlphaFinally, there is a persistent class of winners in the system.John Meriwether for instance. Until, until... Meriwether lost by trying to predict winners. He's not a member of the class that I was talking about. The class of persistent winners thrive not by predicting which investments will win but by predicting that there will always be people trying to predict which investments will win. People are far less stochastic than prices!So... Where are the customer's yachts?
 
User avatar
Cuchulainn
Posts: 62386
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
Contact:

Why is financial research useless?

September 26th, 2014, 2:54 pm

QuoteOriginally posted by: DominicConnorI wonder if this is specific to finance ?If you look at the sheer number of people paid to do research in all fields and the rate at which each one is obliged to produce papers for publication, then divide by the number of things they work out that anyone could possibly care about then it's not suprising that most isn't useful.And can we be sure that the results are always bona-fide?
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Why is financial research useless?

September 26th, 2014, 5:30 pm

QuoteOriginally posted by: rmaxQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4AlphaFinally, there is a persistent class of winners in the system.John Meriwether for instance. Until, until... Meriwether lost by trying to predict winners. He's not a member of the class that I was talking about. The class of persistent winners thrive not by predicting which investments will win but by predicting that there will always be people trying to predict which investments will win. People are far less stochastic than prices!So... Where are the customer's yachts?Where are the casino customer's yachts? Where are the lottery customer's yachts?
 
User avatar
Alan
Posts: 10205
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

Why is financial research useless?

September 26th, 2014, 5:49 pm

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4AlphaFinally, there is a persistent class of winners in the system.John Meriwether for instance. Until, until... Meriwether lost by trying to predict winners. He's not a member of the class that I was talking about. The class of persistent winners thrive not by predicting which investments will win but by predicting that there will always be people trying to predict which investments will win. People are far less stochastic than prices!Right! Plus, there will always be people who believe that there exist other people who can predict winners.These are called institutional investors, as a class also sorely lacking in yachts.
 
User avatar
Gamal
Topic Author
Posts: 2362
Joined: February 26th, 2004, 8:41 am

Why is financial research useless?

September 27th, 2014, 7:44 am

QuoteOriginally posted by: Traden4AlphaThe class of persistent winners thrive not by predicting which investments will win but by predicting that there will always be people trying to predict which investments will win. People are far less stochastic than prices!You mean predicting other people thoughts? Yes, I've seen such superheroes in movies but not in real life.
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Why is financial research useless?

September 27th, 2014, 11:17 am

QuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4AlphaThe class of persistent winners thrive not by predicting which investments will win but by predicting that there will always be people trying to predict which investments will win. People are far less stochastic than prices!You mean predicting other people thoughts? Yes, I've seen such superheroes in movies but not in real life.Does a casino need to predict the thoughts of a gambler in order to win?
 
User avatar
Gamal
Topic Author
Posts: 2362
Joined: February 26th, 2004, 8:41 am

Why is financial research useless?

September 27th, 2014, 12:16 pm

Casinos don't win, they live on fees, which are a bit random but only a bit.
 
User avatar
bearish
Posts: 5618
Joined: February 3rd, 2011, 2:19 pm

Why is financial research useless?

September 27th, 2014, 12:17 pm

QuoteOriginally posted by: GamalNext question in the same area - why publish? A couple of my papers were printed in Risk or elsewhere, it didn't help me find any job nor in any other form AFAIK.This question got sort of drowned out and I think it is worth kicking around a bit. I have similarly published a couple of papers in Risk and a small handful elsewhere, and it is certainly hard to measure the impact on my career, but my best guess is that it has added a little bit to my reputational capital. To some extent, the publications may be like lottery tickets or deep OTM options: unlikely to amount to much, but hey (as the old NY state lottery ads went) you never know! Or you do it to impress friends and family, or just yourself. The attitudes of your managers also matter. Some like the idea of being "thought leaders" and will endorse (and maybe even reward) publications, conference participation, etc. as evidence of such, whereas others barely tolerate it, if at all. As a hiring manager, when I come across a resume of interest that includes a list of publications, I will certainly make an effort to take a look.
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Why is financial research useless?

September 27th, 2014, 12:23 pm

QuoteOriginally posted by: GamalCasinos don't win, they live on fees, which are a bit random but only a bit.That depends on one's definition of "winning".
 
User avatar
Gamal
Topic Author
Posts: 2362
Joined: February 26th, 2004, 8:41 am

Why is financial research useless?

September 27th, 2014, 12:35 pm

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: GamalCasinos don't win, they live on fees, which are a bit random but only a bit.That depends on one's definition of "winning".Casinos make money exactly the same way stock exchanches do. Would we call stock exchanges "persistent winners"? I'm not sure.
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Why is financial research useless?

September 27th, 2014, 12:48 pm

QuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: GamalCasinos don't win, they live on fees, which are a bit random but only a bit.That depends on one's definition of "winning".Casinos make money exactly the same way stock exchanches do. Would we call stock exchanges "persistent winners"? I'm not sure.They win by selling the illusion/opportunity for winning.
Last edited by Traden4Alpha on September 26th, 2014, 10:00 pm, edited 1 time in total.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On