

Duke economist: Most research on why investments do well is all wrong - prakashk
http://www.slate.com/articles/business/moneybox/2014/11/duke_economist_campbell_harvey_most_research_on_why_investments_do_well.html

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g42gregory
Maybe I don't quite understand this article but I am having problems with
quite a few statements there.

For example:

“If I try 20 things,” Harvey says, “then there’s a 95 percent chance that I’ve
got a false positive. Just by chance, something is going to correlate.”

Yes, this is true and we also knew this before from statistics. But what does
this have to do with investment research? Is he saying that just because two
things are correlated, they are good investment candidates? I certainly hope
not. You need Causation, not Correlation, i.e. you need leading indicators of
the right kind.

Does Causation suffers from the “multiple testing” problem? I suspect, Yes,
you might find something that is a leading indicator more easily. I am not
sure that it's a problem for investment research though, because Causations
are rare and you could use anything you could find.

If the authors think that correlations are good enough for investment
research, I kind of doubt their qualifications to write about investment
research in a first place. :-)

Btw, I agree with their conclusion that most investment research accessible to
public is bogus.

Another example:

"Even if a fund does consistently beat the market, it may just be a
coincidence. With so many investment funds out there, some will overperform in
a way that seems statistically significant just by chance."

This is very true as a conclusion, but is Statistics really the cause? If a
fair coin continues to come up "heads", this is certainly possible, but such
an event becomes increasingly unlikely.

Instead blaming statistical effects, an alternative explanations could be that
the fund is using "writing insurance" investment strategy. For example,
selling naked put options for years in a row. They would get an nice
additional income, thus "beating" the market. Until one day, the underlying
stock tanks and the hedge fund will loose a lots of money. All the gains in
previous years will be wiped out and, yes it was a coincidence that they
"outperformed" the market before. Of course, hedge fund does not care much,
since they collected fees from you in previous years.

My point is that this may not have much to do with statistics, especially if a
fund outperform for multiple years in a row.

A lighthearted joke (please don't take it seriously) - change the title to:

"Duke economist: Most research on why investments do well is all wrong,
including the paper I just published!" :-)

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JoeAltmaier
The outperforming-for-4-years fund is statistically insignificant, because it
came from a pool of many funds. They could all have been randomly investing;
one will outperform by chance. That's the statistical argument: the fund
managers had no real information, and in future you can't predict which funds
will continue to profit (the only info you're interested in as an investor).

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nichtich
These argument must be taken with a grain of salt. The truth is you don't know
how many independent random investing they actually make. The classic argument
is that given more than 1000 people there will be someone with a perfect score
in 10 coin toss. But the reality is that some investor only tossed 5 times(big
bet, long term investment), while some others tossed 100 times(short term,
lots of smaller trading). It's much easier to say to a PE fund which only
makes a deal every 2 years that its success is pure luck, than say the same
thing to a high frequency trading firm who trades every second.

~~~
JoeAltmaier
Disagree. If you model stocks as random variable, it doesn't matter which
random variable you follow. Trading just increases the overhead.

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hughdbrown
Here is the argument in a nutshell:
[https://xkcd.com/882/](https://xkcd.com/882/)

If you have enough hypotheses, some will be significant by chance alone.

