OmniTrader Professional Forum
OmniTrader Pro General Discussion
Something to Think About for the New Year
3 replies, 1039 viewings
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OmniTrader Professional Forum
OmniTrader Pro General Discussion
Something to Think About for the New Year
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Last Activity 2/23/2025 4:01 AM 3 replies, 1039 viewings |
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Diamondjag Legend  Posts: 404 Joined: 3/12/2006 Location: Brighton, Colorado  User Profile |
The quotes are summarized in the last sentence: that we all are overconfident about our ability to predict the future. We have an illusion of skill and an illusion of validity (illusion that what we think we know is true). “ my questions about the stock market have hardened into a larger puzzle: a major industry appears to be built largely on an illusion of skill.” “…the first demonstration of this startling conclusion was collected by Terry Odean, a finance professor at UC Berkley. Odean began by studying records of 10,000 brokerage accounts of individual investors spanning a seven year period. He was able to analyze every transaction the investor executed through that firm, nearly 163,000 trades. By these actions the investor revealed that he had a definite idea about the future of the stocks, he expected the stock that he chose to buy to do better than the stock he chose to sell. The results were unequivocally bad. On average, the shares that individual traders sold did better than those they bought by a very substantial margin. “ “Bard Barber wrote a paper titled “Trading is Hazardous to Your Wealth”. It showed that, on average, the most active traders had the poorest results, while the investors who traded the least earned the highest returns.” “Evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically, at least two of every three mutual funds do not achieve their own benchmark in any given year. The successful funds in any given year are mostly lucky, they have a good roll of the dice. There is a general agreement among researchers that nearly all stock pickers, whether they know it or not, and few of them do, are playing a game of chance.” “I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcome of some twenty five anonymous wealth advisers, for each of eight consecutive years. I knew the theory and was prepared to find weak evidence of persistence of skill. Still, I was surprised to find that the average of the 28 correlations was .01. In other words, zero. The consistent correlations that would indicate differences in skill were not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.” “Why do investors, both amateur and professional, stubbornly believe that they can do better than the market? The explanation of the prevalence and persistence of an illusion of skill in the financial world. The most potent psychological cause of the illusion is certainly that the people who pick stocks are exercising high-level skills.” “Unfortunately, skill in evaluating the business prospects of a firm is not sufficient for successful stock trading, where the key question is whether the information about the firm is already incorporated in the price of its stocks. Traders apparently lack the skill to answer this crucial question, but they appear to be ignorant of their ignorance.” “As Nassin Taleb pointed out in “The Black Swan", our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. Everything makes sense in hindsight. The illusion that we understand the past fosters overconfidence in our ability to predict the future. “ “The main point of this chapter is not that people who attempt to predict the future make many errors, that goes without saying. The first lesson is that errors of prediction are inevitable because the world is unpredictable. The second is that high subjective confidence is not to be trusted as an indicator of accuracy.” Dave [Edited by Diamondjag on 12/16/2017 8:18 PM] | ||
| Jim Dean Sage    Posts: 3433 Joined: 3/13/2006 Location: L'ville, GA User Profile |
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| LSJ Veteran Posts: 190 Joined: 7/23/2012 Location: Citrus Springs, FL User Profile |
My view toward trading was permanently altered with the book "Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals" by David Aronson. The distinction between "subjective" and "objective" methods is made. You cannot test subjective methods so every time you trade that way your biases kick in and you have no idea of what the outcome will be, even if you think(bias) you do. Objective methods on the other hand can be tested and produce statistical outcomes for future reference of the method. This is why OT is so valuable to me with the ability to test and statistically assess trading ideas. My biggest problem is remaining 100% objective. I must admit when I get a signal I eyeball the chart set I use for that symbol and consider myself the final filter. The dilemma is that if I intervene I have just thrown out the statistics. If I don't intervene and just take the signal it may fly in the face of what I know(think) about chart reading. Nobody said this was going to be easy! I can't recommend the book too highly for technical traders. | ||
| Diamondjag Legend Posts: 404 Joined: 3/12/2006 Location: Brighton, Colorado User Profile |
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] |
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