Search a little harder under the assumtion the EMH is true and you’re just missing something, and there’s a good bet you’ll find an explanation that makes the prices make sense.
That sounds like confirmation bias.
Search a little harder under the assumption that markets are exploitable, and you’ll start to notice more inefficiencies you could profit from.
The onus is on the person making an extraordinary claim to provide the evidence, not the other way around.
If you think you’ve found an exploit in the market you should absolutely start from the position that you’re wrong, because… you almost certainly are. This is how anyone ought to behave purely out of naked self-interest—it has nothing to do with confirmation bias.
Is my claim really so extraordinary? EMH isn’t settled: it’s contentious. Many economists seem to believe it, but many traders and money managers reject it. I mean, I feel like there are a number of exploitable anomalies that are open secrets at this point. GARCH forecasts. Pairs trading. Momentum. Mean reversion. Fourier spectral filters. Historical vs implied option volatility. These are not beyond the reach of anyone who can do calculus and write code. There are still more whales than sharks in the market.
If you think you’ve found an exploit in the market you should absolutely start from the position that you’re wrong, because… you almost certainly are.
Bayes says you have to look at both sides of the likelihood ratio to update. I don’t particularly care which one you pick first. You should certainly try to test any edge you think you have, and look for missing information. If you develop a good edge it’s easy to make some profit, but it’s always easier to lose money if you’re careless. But don’t give up before you even try.
You should certainly try to test any edge you think you have, and look for missing information. If you develop a good edge it’s easy to make some profit, but it’s always easier to lose money if you’re careless. But don’t give up before you even try.
Yep, I agree with all of this. I guess I way I would phrase it is that we don’t start with a flat prior: we have mountains of evidence that most investors underperform, and that finding an edge is difficult. Doesn’t mean it’s not possible, and absolutely you should try, so long as you’re taking very careful steps not to fool yourself about performance, benchmarking appropriately, etc.
On the ‘open secrets’ - I’m writing a big effort-post right now, and this is one of my main points of confusion - would appreciate your input once it’s up.
I mean, that’s the ideal case. I’m skeptical that my own efforts, or those of most people, would lead them to profit substantially more than they could have by applying their energies to any other line of work.
This is partly based on my own experience doing a mini history of COVID 19 and the stock market, when I was really convinced that the market had behaved irrationally. It was remarkable to see how long it took me to find disconfirming evidence that made me see that the market was just thinking differently. Based on that experience, I’d want to see a whole lot of work sunk into any attempt to find alpha before I was prepared to believe it was real.
I think that “any other line of work” is putting it too strongly. The thing that most appeals to me about trading is that its returns can scale faster than the time put into it: if you have more money, you can invest more money, unlike an office job that gives you small raises, but still consumes all your time.
It’s the difference between owning a business and working for one. But trading is not the only way to do that. There are many other sources of passive income available, and some of them take even less capital than trading in the stock markets.
That sounds like confirmation bias.
Search a little harder under the assumption that markets are exploitable, and you’ll start to notice more inefficiencies you could profit from.
The onus is on the person making an extraordinary claim to provide the evidence, not the other way around.
If you think you’ve found an exploit in the market you should absolutely start from the position that you’re wrong, because… you almost certainly are. This is how anyone ought to behave purely out of naked self-interest—it has nothing to do with confirmation bias.
Is my claim really so extraordinary? EMH isn’t settled: it’s contentious. Many economists seem to believe it, but many traders and money managers reject it. I mean, I feel like there are a number of exploitable anomalies that are open secrets at this point. GARCH forecasts. Pairs trading. Momentum. Mean reversion. Fourier spectral filters. Historical vs implied option volatility. These are not beyond the reach of anyone who can do calculus and write code. There are still more whales than sharks in the market.
Bayes says you have to look at both sides of the likelihood ratio to update. I don’t particularly care which one you pick first. You should certainly try to test any edge you think you have, and look for missing information. If you develop a good edge it’s easy to make some profit, but it’s always easier to lose money if you’re careless. But don’t give up before you even try.
Yep, I agree with all of this. I guess I way I would phrase it is that we don’t start with a flat prior: we have mountains of evidence that most investors underperform, and that finding an edge is difficult. Doesn’t mean it’s not possible, and absolutely you should try, so long as you’re taking very careful steps not to fool yourself about performance, benchmarking appropriately, etc.
On the ‘open secrets’ - I’m writing a big effort-post right now, and this is one of my main points of confusion - would appreciate your input once it’s up.
Sometimes the market is wrong but the barrier to competition is so high that if you try to take advantage of it you run of money.
I mean, that’s the ideal case. I’m skeptical that my own efforts, or those of most people, would lead them to profit substantially more than they could have by applying their energies to any other line of work.
This is partly based on my own experience doing a mini history of COVID 19 and the stock market, when I was really convinced that the market had behaved irrationally. It was remarkable to see how long it took me to find disconfirming evidence that made me see that the market was just thinking differently. Based on that experience, I’d want to see a whole lot of work sunk into any attempt to find alpha before I was prepared to believe it was real.
I think that “any other line of work” is putting it too strongly. The thing that most appeals to me about trading is that its returns can scale faster than the time put into it: if you have more money, you can invest more money, unlike an office job that gives you small raises, but still consumes all your time.
It’s the difference between owning a business and working for one. But trading is not the only way to do that. There are many other sources of passive income available, and some of them take even less capital than trading in the stock markets.