Posts filed under “Mathematics”

Probability, Mean Reversion and Forecasting

We’re down to the Final Four in this year’s iteration of March Madness, also known as the national collegiate basketball tournament. Our earlier discussion of “The March Madness Theory of Investing didn’t sit well with some readers. The lessons we sussed out from the bracket-destroying results included home-country bias, how expert forecasts are about as good as those of nonexperts, and the impact of noise and distraction.

One issue I want to delve into further is why predicting the future seems to be so hard, if not impossible. That particular “lesson” caused quite a bit of pushback.

There were many good responses, but Cullen Roche of Pragmatic Capitalism made perhaps the most interesting observation. In a blog post he wrote:

(P)redicting the future is actually pretty easy in a macro sense. For instance, anyone with a sound understanding of macroeconomics and the capital structure knows, with a very high probability, that stocks will tend to become more valuable over long periods of time because stocks reflect the value of some portion of our overall output.

 I don’t see this so much as a factual disagreement as simply defining epistemological elements differently.

At the risk of repeating myself, let’s define just what a prediction is:

Continues here: March Madness and the Perils of Predicting

 

 

 

Category: Apprenticed Investor, Bad Math, Psychology, Sports

Momentum vs. Mean Reversion

Salil Mehta is a statistician and risk strategist. He served for two years as Director of Analytics in the U.S. Department of the Treasury for the Administration’s $700 billion TARP program. He is the former Director of the Policy, Research, and Analysis Department in the Pension Benefit Guaranty Corporation. Salil is on the Editorial Board for the…Read More

Category: Investing, Mathematics, Research

Dilbert: Beating the Average

Source: Dilbert

Category: Bad Math, Cognitive Foibles, Humor, Investing

No, EVERYTHING Is NOT A Forecast

As one of those folks who has spent a lot of time bashing economic and stock-market forecasters (see this, this, and this), I have no choice but to take issue with an argument made by former hedge-fund manager Jesse Felder, who asserts “that everything is a forecast.” To quote Felder: Can we please stop bashing forecasters already? There is a…Read More

Category: Asset Allocation, Bad Math, Investing, Mathematics

The Amazing Disconnect Between Hedge Fund Performance & AUM

Earlier this week, Greg Zuckerman of the Wall Street Journal pointed out one of the great mysteries of today’s investment landscape: Despite underperforming by a substantial margin, hedge funds keep attracting more investors and assets under management. It is almost as if (to borrow the headline on Zuckerman’s article), “Hedge Funds Keep Winning Despite Losing.”…Read More

Category: Asset Allocation, Bad Math, Hedge Funds, Investing, Psychology

The Unreasonable Effectiveness of Math

Raw Story:

Broadcaster and physicist Brian Cox recently explained why the discovery of the Higgs particle was so amazing.

“We sort of do know what the fuck is going on at some level with subatomic particles,” he said on the Joe Rogan Experience podcast. “If you look to the LHC — the Large Hadron Collider — which is the place where we generate the highest energy, so it is the biggest microscope in the world in that sense, we have an extremely good understanding of the laws of physics at that level, up to and including the discovery of the Higgs particle.”

 

Brian Cox excitedly explains the unreasonable effectiveness of math

 

Category: Mathematics, Science, Video

The Odds of Dying in America

Source: The Economist     Previously: You Are Worrying About the Wrong Things (October 22nd, 2014) You Are More Likely to Be Killed By Boring, Mundane Things than Terrorism (May 20th, 2014)

Category: Bad Math, Data Analysis, Digital Media, Mathematics

Don’t Play Probalities Like the Seahawks in Investing

Last week, I was in Seattle for an event sponsored by the CFA Institute. The trip was booked long before any of us knew the Seahawks were going to defend their championship title in Super Bowl XLIX. Following the Seahawks’ amazing comeback in the NFC Championship versus the Green Bay Packers on Jan. 18, the city…Read More

Category: Bad Math, Investing, Really, really bad calls, Sports

Job Recovery All Oil & Fracking ? Hardly

  “All of the job growth from 2007 to today can easily be attributed to the shale oil fracking situation and the oil Renaissance. If you take Texas and North Dakota out of the data series for job employment, what you see is that we haven’t added any jobs in the United States other than…Read More

Category: Bad Math, Data Analysis, Employment, Energy, Really, really bad calls

As goes early-January, so goes Nothing

Salil Mehta is a popular statistician and risk strategist, who has developed a unique method to teach quantitative techniques. He blogs at Statistical Ideas. ~~~ We’ve started the year with a sizable downward market pattern, which is making market participants think in ill-advised ways.  Eight of the first eleven trading days (S&P 500) were negative.  If…Read More

Category: Bad Math, Data Analysis, Markets