Posts filed under “Mathematics”

Vanguard’s Broken Discipline: The Buy & Hold Model

Yesterday, my buddy Paul showed this Vanguard interactive chart.

Vanguard was trying to show the superiority of Buy & Hold versus “emotional investing.”  I have many issues with their argument.

First, I have to challenge the use of that term — emotional investing — to describe what is a fixed mathematical exit and entry strategy. In fact, that is the exact OPPOSITE of emotional investing: Using predetermined risk management system that operates without any human intervention — a quant black box — is not emotional investing.

Paul used the default settings — something guaranteed to never beat the market. That approach makes Buy & Hold look like the superior strategy. Vanguard shows B&H performance of $63,791 versus in/out performance of $33,628:

Oh, Mr. Bogle, please tell me more about Buy & Hold!


Vanguard did not count on clever market participants engaging in na little clever slide play . . . just a tweak here, down 20% to get you out, up 23% to get you back in — voila! Massive out performance form-fitted to recent history:  B&H performance of $63,791 versus risk managed performance of $88,095:

Risk Management vs Buy & Hold

And, you have not only out-performed over the past decade, you are actually up since 10 years ago — versus still negative for Vanguard.


Thanks Paul,  Bruce, Scott F.

Category: Mathematics, Quantitative, Technical Analysis

Why a Consumer Protection Agency Is Necessary

What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers. The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would…Read More

Category: Bailouts, Credit, Mathematics, Regulation

What Were the Actual Losses in Madoff’s Fraud?

Here is a deceptively complex and subtle legal question involving Ponzi schemes and fraud: What are “losses” in the legal sense of the word? The question arises in the case of Bernie Madoff, whose offices cranked out account statements like they were junk mail. As it turns out after the fact, that was all they…Read More

Category: Legal, Mathematics, Psychology

More WSJ Errors: This Time, Its Math

Last week, we discussed a highly politicized, misleading front page article about new bank rules (WSJ Jumps the Shark). If you recall, that story included a large chart showing much various banks declined, in dollar and percentage terms. Turns out the data was wildly wrong. The Journal ran a milquetoast correction, under the heading “Corrections…Read More

Category: Financial Press, Mathematics

How Many Quants Does It Take to Screw in a Lightbulb?

Matthew Greenfield of StoneWork Capital answers the above question thusly: “Using ten racks of co-located blade servers, one quant can detect a janitorial inefficiency, step in between janitor and light fixture, and screw in 49,500 bulbs in less than a millisecond, keeping five hundred lightbulbs of profit. Two quants competing with each other can screw…Read More

Category: Humor, Mathematics, Weekend

Help Wanted: Quant for Model Development

A successful fund manager friend is developing a new Model for running assets. He has a solid math background, but needs a good quant to help him develop and refine his approach. He is looking for two people — a college grad/student, and a PHD mathematician. They run a variety of different types of long…Read More

Category: Mathematics

Statistics: Scientific Consensus on Climate Change?

One of the memes I’ve heard recently in the climate debate is that there is no scientific consensus — that there is actually strong disagreement. The main basis of this argument is that 31,486 dissenting scientists have signed a petition against the belief that Global Warming is man made at the I don’t want…Read More

Category: Mathematics, Really, really bad calls, Science

Fox News (Chicago) Makes the Best. Pie Chart. Ever.

Fair & Balanced? Not exactly. Mathematically competent? Not one tiny bit. > Hat tip Flowing Data ~~~ Update: Here is the Video (Nov 23)

Category: Financial Press, Mathematics, Politics, Really, really bad calls, Television

Site of the Day:

> Some good learnin’ here: This web site stems from a personal interest in critical thinking and is a collection of links to articles and sites pertaining to numeracy and critical thinking. Links should be good for at least the date posted. After the posting date, link reliability depends on the policy of the linked…Read More

Category: Mathematics, Really, really bad calls

The Hubris of Economics

On Tuesday, the 2nd most emailed article on was Crisis Compels Economists To Reach for New Paradigm.

It is an intriguing look at the problems of the the field of economics. It went, however, way too easy on both the profession and its practitioners. The article fails to ask some very basic questions about the soft science, and does not discuss the fundamental incompetency of many economists.

Given the failures of the profession — failing to anticipate the worst recession in decades, missing the warping effect of the housing boom, not recognizing the credit collapse until too late — a damning indictment of the dismal science might have been more appropriate.

Perhaps I can be of assistance.

There are many areas I would have liked to see the Economics Crisis article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics. I will just touch on some of these; you can fill in much of the blanks yourself.

Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.

Science is the ultimate “show me” state.

Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

Where was I?  Ahhh, our sad tale of the practitioners of the dismal arts.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .


Economics has had a justifiable inferiority complex versus real sciences the past century. It has attempted to overcome this by throwing lots of smart mathematicians at its practice, in an attempt to make the social art seem more “sciency,” and thus  more credible. This had led to lots and lots of formulas and models. The problems is, Economics places way too much weight on these. It creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management.

Economics forgot George E. P. Box’s most basic rule:

“Essentially, all models are wrong, but some are useful”

Box was a statistician who recognized the fundamental truth of all attempts to depict the universe mathematically: They are inherently flawed.

He also understood that these flawed attempts can at times have value. His insights contextualize what mathematical modelers do — and fail to achieve.

Economics fails at this often.  The belief in the validity of their models — like the theories they are based upon — is the Achilles heel of the profession.

This is not to say there are not good, even great economists (some are even friends of mine!) who foresaw the coming crisis and warned about it. Many are aghast at the rigor mortis in the academic establishment; some are horrified at how poorly the profession has done. Forget forecasting the future, too many economists cannot accurately describe what happened yesterday.

The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.


Excerpt after the jump.


The Mystery of the Awful Economists, 3/2/2005 3:42 PM EST

(If you cannot access the Real Money piece, click here).

Mystery of the Awful Economists, part II (April 8th, 2005)

Mystery of the Awful Economists part III (April 13th, 2005)

RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)

Why Economists Missed the Crises (January 5th, 2009)

The Big Picture: On the Efficient Market Hypothesis (2005-09)

The Big Picture: On Prediction Markets (2004-09)

Crisis Compels Economists To Reach for New Paradigm

Read More

Category: Markets, Mathematics, Really, really bad calls