My guest today is Brian Christian, an American non-fiction author, poet, programmer and researcher, best known for the two bestselling books The Most Human Human (2011) and Algorithms to Live By (2016).
The topic is his book Algorithms to Live By: The Computer Science of Human Decisions.
In this episode of Trend Following Radio we discuss:
Optimal stopping
What is an algorithm
Process vs. Outcome
The explore, exploit trade off
The multi-arm bandit problem
Win stay, lose shift
Regret minimization framework
Frequency and intensity of mistakes related to age
Upper confidence bound algorithm
Threading
“There is this argument that could be made, in a number of situations, where mess is not only the easy choice but it can be the optimal choice.” – Brian Christian
I hope you are keeping well since we last corresponded over email. I have been actively listening and going back through all your podcasts and I wanted to say: please do not take the avenue of being more politically correct. I seriously love listening to your podcasts when you dig into people, organizations, and governments. It is really refreshing to hear someone actually saying something with such passion. This being said, you are also so respectful with your commentary and insights during guest interviews which makes your guests feel very comfortable to share their experiences and knowledge. You are achieving your goal of having your podcast content truly timeless as I feel that the content you share with the world will be just as relevant in 100 years from now. Thank you for taking the time to create such an interesting podcast.
One final note I would like to make: I wanted to apologize for how I acted earlier in the course. I went back through some of my emails and realized that I was acting entitled by asking for such detailed information about how you specifically trade and how other investors manage their trades. I was looking for the easy path and for this I am sorry about how I wrote my emails to you. I now realize that this zero sum game is centered around passion for the process that best fits each investors needs. My portfolio heat setting is different from your heat setting because it all depends on my edge, symbol portfolio and strategy I am using. I believe everything happens for a reason and the lesson I learned from going back over my emails was that you were teaching me to think on my own and that there is no set formula that states: “do these five things and then you will be guaranteed to earn this much.” I realize there are some general rules and theory that needs to be followed but there is never a day when you can say, “I am done learning because I know it all.” While I know we have never met or even spoke on the phone, I would like to tell you that I truly value you as a mentor in my life. I look forward to the day when I have done all my homework and familiarized myself with all the reading material, podcasts and commentary you have put out there so that we can meet and have a really good chat.
I think you’re doing a great job, but there is one request that I have. Given the importance of this election season I would love for you to spend more time discussing the “system” and why it is so important to not bury our heads in the sand. I’m a Libertarian, but will be voting for Trump as a matter of principal to do my part to stop Clinton from controlling our government. Someone like her, who has lined her pockets with the perks of the system, will do nothing but exacerbate the problems Ed Seykota highlights in his “Govopoly” book. Due to your large audience it would be doing our society a service by highlighting how important the stakes are in this election. Even if you do not want to explicitly endorse Trump, I think it would be wonderful for Ed to come on and give us his opinion on the 2016 election if he is willing and able.
Please enjoy my monologue Trump the Fed with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
Hello Michael. I’m too new (I’m only 65) to offer advice. Give me a year. Seriously, I’m about halfway through the Tom Basso podcast. VERY helpful as you and he identify the order of importance of things to prioritize. I am a Nervous Nellie when it comes to trading, so I’m at a disadvantage here—I don’t know yet if my temperament is malleable enough to adjust to the opposite end of the patience spectrum; but money management? I can learn and do. I’ve been practicing pieces of it since I learned about options a couple years ago—that’s just where I heard about it first in terms of choosing an initial position size and setting stops based on volatility. I’m still backwards, though on when to add to winning positions. I also don’t hedge well at all.
Honestly, I’ve tried to maximize rate of growth rather than optimize ABSOLUTE return, a VERY different game—my success is limited at best, and it requires a lot of “seat time”. Part of my lack of success is the time lost ”adjusting” it—lately, to increase simplicity. But, it’s also a psychological fit, so it’s hard to walk away from, and I need to for reasons of physical and mental health.
I’ve also gotten to Part III of your book Trend Following. It’s good to see an exemplar on how to improve myself in managing my trading account’s balances. It is indeed very hard to watch price and to tune out the noise, but my CNBC watching is down 95% in the last two months, having already decided it was costing me time to regain my fitness, work on brain retention, and being a good husband. It also added anxiety to my mental state during the trading day and loaded me up with conflicting information.
Do I understand correctly that you don’t trade individual stocks, but rather, trade broader asset classes? If so, is it because it’s hard to hedge against specific stock risk? To this point in the book, there have been charts and tables illustrating how balances grow using trend following, but I missed it if there were illustrations of some stock charts that would illustrate “how a trend follower trades a stock”. Tying in the podcast, the point that picking the asset is lowest in importance of the five things to focus on, so it raised the question in my mind. Like I say, though, I’m only halfway through the book.
Setting stops is problematic for me. The one that makes the most sense to me for holding periods that Trend Trading requires is [name] and [name] as the basis for setting trailing stops and risk-weighted portfolio balancing. I’m a math guy, albeit in [name], but my working knowledge of stats is decent enough to have taught it a few times at various levels of college and with different balances of practical vs theoretical goals, depending on the course goals. All my prior attempts at Trailing stops were a bit ad hoc, or were more suitable for short-term trading.
If an asset trades on a stock exchange, I can play. I don’t have the courage to branch out to futures at this point, nor sufficient free cash to commit to learning them. ETF’s for select commodities and currencies are doable.
Big picture: You can trade most markets as a trend follower, but you have to consider correlations or your risk management blows up. More in a private response to follow.
I have spent more [than] $30k on technical analysis courses and books that mainly focus on W.D Gann. I have never been able to get it working consistently and have taken some big hits along the way with forecasts that have done, the market reacts but sometimes on for a day… I can forecast but not trade!
You mentioned in one of your podcasts that I have just listened to that you would provide a list of steps and a video to guide me on my way. Trading is something I really want to get working as I work for a fortune 500 IT company and I am tiered of the “will I have a job in 6 months” uncertainty.
I have a lot of work ahead of me understanding your work, from the outset it seems the most logical and constant. And will teach me to actually trade.
