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Politics : Canadian Political Free-for-All
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To: 3bar who wrote (19449)4/20/2019 9:58:13 AM
From: Sun Tzu1 Recommendation

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3bar

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>> What would you think of a predictive model with 97 % accuracy on back test ?

Not much at all, or I would have been a billionaire long time ago.

What you are describing is a common fallacy of the novice facing complex dynamic systems. It has nothing to do with education or intelligence - it is simply a matter of experience. It is a hard concept to grasp for people who have not banged their head against that wall for a few years. So let me explain.

We now have close to 30 years of detailed trading and economic data that covers just about every kind of economic boom and bust (Asian Crisis, Russian Crisis, the Housing bust, The Great Recession, The Dot-Com Boom [and bust] etc). Companies with billions of dollars and access to best and greatest minds and technology resources have tried to back-test stock market trading algorithms and not a single one of them has succeeded in the way that you seem to believe one can succeed. At one time or another, every major Wall St. firm has been a client of mine. Two of them were top global hedge funds, and one of those (D.E. Shaw) specializes in algorithmic trading. So I am pretty intimately aware of such efforts.

The only companies that have survived are those who take all conflicting views into account and thread carefully. Those who end up in love with their own models crash in a most spectacular way (Do you remember LTCM crash?!?). Given how high the stakes are, it would be idiotic not to hedge our bets.
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