10 Ideas for the Weekend
Entries and exits are portfolios, too, independent of alpha
Design a strategy that works when there is no alpha
Think of factors as heuristics and then manipulate the heuristic and convert back to factors to find more factors –
- Anchoring and adjustment – Describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. For example, in a study done with children, the children were told to estimate the number of jellybeans in a jar. Groups of children were given either a high or low “base” number (anchor). Children estimated the number of jellybeans to be closer to the anchor number that they were given.
- Availability heuristic – A mental shortcut that occurs when people make judgments about the probability of events by the ease with which examples come to mind. For example, in a 1973 Tversky & Kahneman experiment, the majority of participants reported that there were more words in the English language that start with the letter K than for which K was the third letter. There are actually twice as many words in the English Language that have K as the third letter as those that start with K, but words that start with K are much easier to recall and bring to mind.
- Representativeness heuristic – A mental shortcut used when making judgments about the probability of an event under uncertainty. Or, judging a situation based on how similar the prospects are to the prototypes the person holds in his or her mind. For example, in a 1982 Tversky and Kahneman experiment, participants were given a description of a woman named Linda. Based on the description, it was likely that Linda was a feminist. 80–90% of participants, choosing from 2 options, chose that it was also more likely for Linda to be: a feminist and a bank teller; than just a bank teller. The likelihood of two events cannot be greater than that of either of the two events individually. For this reason, the representativeness heuristic is exemplary of the conjunction fallacy.
- Naïve diversification – When asked to make several choices at once, people tend to diversify more than when making the same type of decision sequentially.
- Escalation of commitment – Describes the phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the cost, starting today, of continuing the decision outweighs the expected benefit.
- Familiarity heuristic – A mental shortcut applied to various situations in which individuals assume that the circumstances underlying the past behavior still hold true for the present situation and that the past behavior thus can be correctly applied to the new situation. Especially prevalent when the individual experiences a high cognitive load.
Are ensembles the most curve fit of strategies or the least? The most adaptive or least?
Ebb and flow and on and off, are very different. On and off is very hard
At 10,000 hours the numbers begin to talk. At 100,000 hours they begin to sing. And after that they descend into the wonderful cacophony of madness.
Numbers, statistics, indicators and alpha talk to us. What happens when we talk to the them?
Optimal f is a proxy for Sharpe ratio.
Good filters cut the number of trades by half and double returns. If a good filter also doubles ability to leverage, is the filtered strategy better than the original?
In a portfolio, not every component is expected to contribute at it’s highest level because of ebb and flow of the components. What would a portfolio where each component operates at peak performance look like?
If you like these ideas, you might like my book because it’s not about the election