You still have to be able to translate your superior relevant knowledge into odds in order to set the terms of the bet however. Do you not believe that this is an ability that people have varying degrees of aptitude for?
They sure do, but in all the examples I can think of, people either just follow their intuition directly when faced with a concrete situation, or employ rigorous science to attack the problem. (It doesn’t have to be the official accredited science, of course; the Venn diagram of official science and valid science features only a partial overlap.) I just don’t see any practical examples of people successfully betting by doing calculations with probability numbers derived from their intuitive feelings of confidence that would go beyond what a mere verbal expression of these feelings would convey. Can you think of any?
If you accept that true alpha exists (and the evidence suggests that though rare a small percentage of the best investors do appear to have positive alpha) then what process do you believe those who possess it use to decide which investments are good and which bad?
Well, if I knew, I would be doing it myself—and I sure wouldn’t be talking about it publicly!
The problem with discussing investment strategies is that any non-trivial public information about this topic necessarily has to be bullshit, or at least drowned in bullshit to the point of being irrecoverable, since exclusive possession of correct information is a sure path to getting rich, but its effectiveness critically depends on exclusivity. Still, I would be surprised to find out that the success of some alpha-achieving investors is based on taking numerical expressions of common-sense confidence seriously.
In a sense, a similar problem faces anyone who aspires to be more “rational” than the average folk in any meaningful sense. Either your “rationality” manifests itself only in irrelevant matters, or you have to ask yourself what is so special and exclusive about you that you’re reaping practical success that eludes so many other people, and in such a way that they can’t just copy your approach.
What’s your opinion on prediction markets? They seem to produce fairly good probability estimates so presumably the participants must be using some better-than-random process for arriving at numerical probability estimates for their predictions.
I agree with this assessment, but the accuracy of information aggregated by a prediction market implies nothing about your own individual certainty. Prediction markets work by cancelling out random errors and enabling specialists who wield esoteric expertise to take advantage of amateurs’ systematic biases. Where your own individual judgment falls within this picture, you cannot know, unless you’re one of these people with esoteric expertise.
I just don’t see any practical examples of people successfully betting by doing calculations with probability numbers derived from their intuitive feelings of confidence that would go beyond what a mere verbal expression of these feelings would convey. Can you think of any?
I’d speculate that bookies and professional sports bettors are doing something like this. By bookies here I mean primarily the kind of individuals who stand with a chalkboard at race tracks rather than the large companies. They probably use some semi-rigorous / scientific techniques to analyze past form and then mix it with a lot of intuition / expertise together with lots of detailed domain specific knowledge and ‘insider’ info (a particular horse or jockey has recently recovered from an illness or injury and so may perform worse than expected, etc.). They’ll then integrate all of this information together using some non mathematically rigorous opaque mental process and derive a probability estimate which will determine what odds they are willing to offer or accept.
I’ve read a fair bit of material by professional investors and macro hedge fund managers describing their thinking and how they make investment decisions. I think they are often doing something similar. Integrating information derived from rigorous analysis with more fuzzy / intuitive reasoning based on expertise, knowledge and experience and using it to derive probabilities for particular outcomes. They then seek out investments that currently appear to be mis-priced relative to the probabilities they’ve estimated, ideally with a fairly large margin of safety to allow for the imprecise and uncertain nature of their estimates.
It’s entirely possible that this is not what’s going on at all but it appears to me that something like this is a factor in the success of anyone who consistently profits from dealing with risk and uncertainty.
The problem with discussing investment strategies is that any non-trivial public information about this topic necessarily has to be bullshit, or at least drowned in bullshit to the point of being irrecoverable, since exclusive possession of correct information is a sure path to getting rich, but its effectiveness critically depends on exclusivity.
My experience leads me to believe that this is not entirely accurate. Investors are understandably reluctant to share very specific time critical investment ideas for free but they frequently share their thought processes for free and talk in general terms about their approaches and my impression is that they are no more obfuscatory or deliberately misleading than anyone else who talks about their success in any field.
In addition, hedge fund investor letters often share quite specific details of reasoning after the fact once profitable trades have been closed and these kinds of details are commonly elaborated in books and interviews once time-sensitive information has lost most of its value.
Either your “rationality” manifests itself only in irrelevant matters, or you have to ask yourself what is so special and exclusive about you that you’re reaping practical success that eludes so many other people, and in such a way that they can’t just copy your approach.
This seems to be taking the ethos of the EMH a little far. I comfortably attribute a significant portion of my academic and career success to being more intelligent and a clearer thinker than most people. Anyone here who through a sense of false modesty believes otherwise is probably deluding themselves.
Where your own individual judgment falls within this picture, you cannot know, unless you’re one of these people with esoteric expertise.
This seems to be the main point of ongoing calibration exercises. If you have a track record of well calibrated predictions then you can gain some confidence that your own individual judgement is sound.
Overall I don’t think we have a massive disagreement here. I agree with most of your reservations and I’m by no means certain that improving one’s own calibration is feasible but I suspect that it might be and it seems sufficiently instrumentally useful that I’m interested in trying to improve my own.
I’d speculate that bookies and professional sports bettors are doing something like this. [...] I’ve read a fair bit of material by professional investors and macro hedge fund managers describing their thinking and how they make investment decisions. I think they are often doing something similar.
Your knowledge about these trades seems to be much greater than mine, so I’ll accept these examples. In the meantime, I have expounded my whole view of the topic in a reply to an excellent systematic list of questions posed by prase, and in those terms, this would indicate the existence of what I called the third type of exceptions under point (3). I still maintain that these are rare exceptions in the overall range of human judgments, though, and that my basic point holds for the overwhelming majority of human common-sense thinking.
Investors are understandably reluctant to share very specific time critical investment ideas for free but they frequently share their thought processes for free and talk in general terms about their approaches and my impression is that they are no more obfuscatory or deliberately misleading than anyone else who talks about their success in any field.
I don’t think they’re being deliberately misleading. I just think that the whole mechanism by which the public discourse on these topics comes into being inherently generates a nearly impenetrable confusion, which you can dispel to extract useful information only if you are already an expert in the first place. There are many specific reasons for this, but it all ultimately comes down to the stability of the weak EMH equilibrium.
This seems to be taking the ethos of the EMH a little far. I comfortably attribute a significant portion of my academic and career success to being more intelligent and a clearer thinker than most people. Anyone here who through a sense of false modesty believes otherwise is probably deluding themselves.
Oh, absolutely! But you’re presumably estimating the rank of your abilities based on some significant accomplishments that most people would indeed find impossible to achieve. What I meant to say (even though I expressed it poorly) is that there is no easy and readily available way to excel at “rationality” in any really relevant matters. This in contrast to the attitude, sometimes seen among the people here, that you can learn about Bayesianism or whatever else and just by virtue of that set yourself apart from the masses in accuracy of thought. The EMH ethos is, in my opinion, a good intellectual antidote against such temptations of hubris.
mattnewport:
They sure do, but in all the examples I can think of, people either just follow their intuition directly when faced with a concrete situation, or employ rigorous science to attack the problem. (It doesn’t have to be the official accredited science, of course; the Venn diagram of official science and valid science features only a partial overlap.) I just don’t see any practical examples of people successfully betting by doing calculations with probability numbers derived from their intuitive feelings of confidence that would go beyond what a mere verbal expression of these feelings would convey. Can you think of any?
Well, if I knew, I would be doing it myself—and I sure wouldn’t be talking about it publicly!
The problem with discussing investment strategies is that any non-trivial public information about this topic necessarily has to be bullshit, or at least drowned in bullshit to the point of being irrecoverable, since exclusive possession of correct information is a sure path to getting rich, but its effectiveness critically depends on exclusivity. Still, I would be surprised to find out that the success of some alpha-achieving investors is based on taking numerical expressions of common-sense confidence seriously.
In a sense, a similar problem faces anyone who aspires to be more “rational” than the average folk in any meaningful sense. Either your “rationality” manifests itself only in irrelevant matters, or you have to ask yourself what is so special and exclusive about you that you’re reaping practical success that eludes so many other people, and in such a way that they can’t just copy your approach.
I agree with this assessment, but the accuracy of information aggregated by a prediction market implies nothing about your own individual certainty. Prediction markets work by cancelling out random errors and enabling specialists who wield esoteric expertise to take advantage of amateurs’ systematic biases. Where your own individual judgment falls within this picture, you cannot know, unless you’re one of these people with esoteric expertise.
I’d speculate that bookies and professional sports bettors are doing something like this. By bookies here I mean primarily the kind of individuals who stand with a chalkboard at race tracks rather than the large companies. They probably use some semi-rigorous / scientific techniques to analyze past form and then mix it with a lot of intuition / expertise together with lots of detailed domain specific knowledge and ‘insider’ info (a particular horse or jockey has recently recovered from an illness or injury and so may perform worse than expected, etc.). They’ll then integrate all of this information together using some non mathematically rigorous opaque mental process and derive a probability estimate which will determine what odds they are willing to offer or accept.
I’ve read a fair bit of material by professional investors and macro hedge fund managers describing their thinking and how they make investment decisions. I think they are often doing something similar. Integrating information derived from rigorous analysis with more fuzzy / intuitive reasoning based on expertise, knowledge and experience and using it to derive probabilities for particular outcomes. They then seek out investments that currently appear to be mis-priced relative to the probabilities they’ve estimated, ideally with a fairly large margin of safety to allow for the imprecise and uncertain nature of their estimates.
It’s entirely possible that this is not what’s going on at all but it appears to me that something like this is a factor in the success of anyone who consistently profits from dealing with risk and uncertainty.
My experience leads me to believe that this is not entirely accurate. Investors are understandably reluctant to share very specific time critical investment ideas for free but they frequently share their thought processes for free and talk in general terms about their approaches and my impression is that they are no more obfuscatory or deliberately misleading than anyone else who talks about their success in any field.
In addition, hedge fund investor letters often share quite specific details of reasoning after the fact once profitable trades have been closed and these kinds of details are commonly elaborated in books and interviews once time-sensitive information has lost most of its value.
This seems to be taking the ethos of the EMH a little far. I comfortably attribute a significant portion of my academic and career success to being more intelligent and a clearer thinker than most people. Anyone here who through a sense of false modesty believes otherwise is probably deluding themselves.
This seems to be the main point of ongoing calibration exercises. If you have a track record of well calibrated predictions then you can gain some confidence that your own individual judgement is sound.
Overall I don’t think we have a massive disagreement here. I agree with most of your reservations and I’m by no means certain that improving one’s own calibration is feasible but I suspect that it might be and it seems sufficiently instrumentally useful that I’m interested in trying to improve my own.
mattnewport:
Your knowledge about these trades seems to be much greater than mine, so I’ll accept these examples. In the meantime, I have expounded my whole view of the topic in a reply to an excellent systematic list of questions posed by prase, and in those terms, this would indicate the existence of what I called the third type of exceptions under point (3). I still maintain that these are rare exceptions in the overall range of human judgments, though, and that my basic point holds for the overwhelming majority of human common-sense thinking.
I don’t think they’re being deliberately misleading. I just think that the whole mechanism by which the public discourse on these topics comes into being inherently generates a nearly impenetrable confusion, which you can dispel to extract useful information only if you are already an expert in the first place. There are many specific reasons for this, but it all ultimately comes down to the stability of the weak EMH equilibrium.
Oh, absolutely! But you’re presumably estimating the rank of your abilities based on some significant accomplishments that most people would indeed find impossible to achieve. What I meant to say (even though I expressed it poorly) is that there is no easy and readily available way to excel at “rationality” in any really relevant matters. This in contrast to the attitude, sometimes seen among the people here, that you can learn about Bayesianism or whatever else and just by virtue of that set yourself apart from the masses in accuracy of thought. The EMH ethos is, in my opinion, a good intellectual antidote against such temptations of hubris.