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Mathematical InvestorMathematicians Against Fraudulent Financial and Investment Advice (MAFFIA)CommentsPosts MAFFIA.org websiteBacktest demo“Tenure Maker” demoSelection bias video OverviewEssaysNewsDisclaimer and copyrightBook reviews CategoriesBook reviewsDisclaimer and copyrightEssaysNewsOverviewArchivesMarch 2022February 2022January 2022November 2021June 2021February 2021December 2020October 2020July 2020June 2020April 2020January 2020December 2019November 2019October 2019September 2019July 2019June 2019May 2019April 2019March 2019February 2019January 2019November 2018September 2018August 2018July 2018June 2018May 2018April 2018March 2018January 2018December 2017October 2017September 2017August 2017July 2017December 2015October 2015September 2015June 2015April 2015February 2015January 2015December 2014November 2014September 2014August 2014July 2014June 2014May 2014April 2014March 2014February 2014January 2014December 2013November 2013October 2013 Active mutual funds underperform passive funds, againCredit: Mutual Fund Advisors Introduction For the vast majority of individuals investors, investing in one or a small number of mutual funds or exchange-traded funds makes more sense than directly owning a set of stocks or bonds. For one thing, investors often sleep better with mutual funds, rather than fretting whenever one of their stock or bond holdings is mentioned in a news report. Also, for many individuals, mutual fund holdings are less likely to run afoul of conflict-of-interest difficulties in their professional work.In a previous Mathematical Investor blog, we presented data on actively managed versus passive fund Continue reading Active mutual funds underperform passive funds, againMarch 3rd, 2022 | Category: Essays | Comments are closed Backtest overfitting and the post-hoc probability fallacyA 13-card hand dealt “at random” Introduction In several articles on this site (see, for instance, A and B), we have commented on the dangers of backtest overfitting in finance.By backtest overfitting, we mean the usage of historical market data to develop an investment model, strategy or fund, where many variations are tried on the same fixed dataset. Backtest overfitting, a form of selection bias under multiple testing, has long plagued the field of finance and is now thought to be the leading reason why investments that look great when designed often disappoint when actually fielded to investors. Continue reading Backtest overfitting and the post-hoc probability fallacyFebruary 1st, 2022 | Category: Essays | Comments are closed How backtest overfitting in finance leads to false discoveriesThe present author, together with Marcos López de Prado, has just published the article How backtest overfitting in finance leads to false discoveries in Significance, a journal of the British Statistical Society. The published article is now available at the Significance (Wiley) website.This article is condensed from the following manuscript, which is freely available from SSRN: Finance is Not Excused: Why Finance Should Not Flout Basic Principles of Statistics.This paper introduces the problem of backtest overfitting in finance to the general reader who may be trained in the basics of statistics but not necessarily familiar with the application Continue reading How backtest overfitting in finance leads to false discoveriesJanuary 10th, 2022 | Category: Essays | Comments are closed The brave new world of probability and statisticsBlock function approximation to normal distribution Introduction Today, arguably more than ever before, the world is governed by the science of probability and statistics. “Big data” is now the norm in scientific research, with terabytes of data streaming into research centers from satellites and experimental facilities, analyzed by supercomputers. “Data mining” is now an essential part of mathematical finance and business management. Numerous public opinion polls, expertly analyzed, guide the political arena. Covid-19 infection rates, immunization levels and r0 factors are a staple of nightly newscasts. Yet the public at large remains mostly ignorant of the basic principles Continue reading The brave new world of probability and statisticsNovember 3rd, 2021 | Category: Essays | Comments are closed Can astrology predict financial markets??Venice astrological circle; credit Wikimedia Astrology in finance? In a previous MathInvestor article, we mentioned how absurd it would be if someone offered predictions of stock or bond prices or cryptocurrency rates based on astrological signs.Consider for a moment that financial market prices are based on a confluence of many thousands of factors worldwide, including developments in science and technology, changes in consumer sentiment and preferences, changes in prices of production, public health emergencies (e.g., Covid-19), political developments, competition with other financial instruments and even changes in weather. These prices are negotiated electronically, on behalf of millions of Continue reading Can astrology predict financial markets??June 17th, 2021 | Category: Essays | Comments are closed The failure of anomaly indicators in financeA black swan; credit: Wikimedia The replicability crisis in science Recent public reports have underscored a crisis of replicability in numerous fields of science: In 2012, Amgen researchers reported that they were able to replicate fewer than 10 of 53 cancer studies. In March 2014, physicists announced with fanfare that they had detected evidence of gravitational waves from the “inflation” epoch of the big bang. However, other researchers were unable to verify this conclusion. The current consensus is that the twisting patterns in the data are due to dust in the Milky Way, not inflation. In 2015, in a Continue reading The failure of anomaly indicators in financeFebruary 1st, 2021 | Category: Essays | Comments are closed Another miserable year for market forecastersVenice astrological circle; credit Wikimedia Pseudoscience and forecasting Suppose, during a nightly TV weather broadcast, that a reporter presented forecasts by persons, with no credentials in mathematical meteorology, who based their analysis on eyeballing a few charts and graphs. If anyone took such amateur forecasts seriously, when a severe storm was approaching, rather than relying on the consensus of qualified scientists assisted by state-of-the-art supercomputer models, they would risk disaster.Or suppose that someone suggested that “biorhythms” (a person’s presumed daily, monthly and yearly cycles that supposedly start in sync at birth) could be used to predict the performance Continue reading Another miserable year for market forecastersDecember 20th, 2020 | Category: Essays | Comments are closed López de Prado on machine learning in financeMarcos López de Prado Introduction Marcos López de Prado, whom we have featured in previous Math Scholar articles (see Article A, Article B and Article C), has been invited to present a keynote presentation at the ACM Conference on Artificial Intelligence in Finance, to be conducted virtually October 14-16, 2020.López de Prado is a faculty member of Cornell University and also CEO of True Positive Technologies, LP, a private firm that provides machine learning techniques techniques for finance applications. He is also the author of two books in the field: Advances in Financial Machine Learning, published by Wiley Continue reading López de Prado on machine learning in financeOctober 9th, 2020 | Category: Essays | Comments are closed Day-trading in the age of coronavirus Amateur pseudoscience Suppose, during a TV weather broadcast, that the reporter presented “forecasts” from several private persons, wholly unqualified in meteorology, who base their forecasts on eyeballing a handful of charts and graphs. Most of us would never rely on such clearly amateurish methods ourselves, and would reject outright any such forecasts presented by others. If anyone took such forecasts seriously, when a severe storm was approaching, rather than relying on the consensus of qualified government scientists assisted by state-of-the-art supercomputer models, they would risk disaster, including the potential loss of life.Similarly, suppose that after an examination at Continue reading Day-trading in the age of coronavirusJuly 10th, 2020 | Category: Essays | Comments are closed Covid-19 and the worth of a human lifeThe scales of justice (courtesy Wikimedia) Covid-19’s grim toll The statistics are staggering: As of 1 June 2020, according to the Johns Hopkins University database, the U.S. had logged over 1.811 million confirmed cases of Covid-19 and over 105,000 deaths. The U.K. was next, with over 277,000 confirmed cases and over 38,000 deaths. Worldwide, over 6.3 million cases had been confirmed, with more than 376,000 deaths. If current trends continue, the U.S. death toll alone will soon exceed that of all wars in its history except for the Civil War and World War II.The economic costs have been Continue reading Covid-19 and the worth of a human lifeJune 4th, 2020 | Category: Essays | Comments are closed Older Entries » Recent PostsActive mutual funds underperform passive funds, againBacktest overfitting and the post-hoc probability fallacyHow backtest overfitting in finance leads to false discoveriesThe brave new world of probability and statisticsCan astrology predict financial markets??The failure of anomaly indicators in financeAnother miserable year for market forecastersLópez de Prado on machine learning in financeDay-trading in the age of coronavirusCovid-19 and the worth of a human lifeMetaLog inEntries feedComments feedWordPress.org Copyright © 2022 Mathematical Investor - All Rights ReservedPowered by WordPress & Atahualpa