Diamondjag Legend  Posts: 404 Joined: 3/12/2006 Location: Brighton, Colorado  User Profile | LSJ - A very important point. Further reading in "Thinking Fast and Slow" shows that in numerous studies, what they call "using an algorithm" equals or beats judgement in virtually all areas of study, "length of hospital stays, prospects of success for new businesses, suitability of foster parents, winners of football games, credit risk for banks"...the list goes on and on. Kahneman says, "each of these domains entails a significant degree of uncertainty and unpredictability. In every case, the accuracy of experts was matched or exceeded by a simple algorithm." This has significant implication for us a traders. Basically, the answers, information, rules from back testing will be more predictive of future price behavior than our own judgement. Kahneman goes on to say, "Several studies have show that human decisions makers are inferior to a prediction formula even when they are given the score suggested by the formula!" They feel that they can overrule the formula because they had additional information about the case, but they are wrong more often than not. According to Meehal (one of the researchers) there are few circumstances under which it is a good idea to substitute judgment for a formula." One reason, he says, is that humans are "incorrigibly inconsistent in making summary judgments of complex information. When asked to evaluate the same information twice, they frequently give different answers. Another reason is that "experts try to be clever, think outside the box, and consider complex combination of features in making their predictions. Complexity may work in the odd case, but more often than not it reduces validity. Simple combinations of features are better. The research suggests a surprising conclusion : to maximize predictive accuracy, final decision should be left to formulas, especially in low-validity environments." Bottom line to traders....trust your system, keep it simple, and don't override it! [Edited by Diamondjag on 12/17/2017 10:58 AM] | |
