Human beings have a strange habit of trusting other humans, even when the trust isn’t warranted. Everywhere in mainstream media, statistics are used and misused to convey an agenda. All too often, people ignore the agenda and buy into this engineered information.
To be successful, both in life and in trading, a person must move beyond this behavior. You need to be a skeptic. You can’t put blind faith into a system that doesn’t make its agenda clear. You probably shouldn’t trust it even if the agenda does seem clear. This is just as true when considering pollsters like Frank Luntz as it is when listening to the sales pitches of discretionary traders on Wall Street.
In today’s episode Michael Covel discusses the biases we have as human beings that lead us to poor investing decisions. Most notably, it is a bias that prevents us from trusting algorithmic trading, even when a human alternative is demonstrably worse. Through entertaining and insightful clips, Michael demonstrates why algorithms deserve our trust: their accountability and their ability to be back tested through different market conditions.
The episode is full of interesting sound clips and passages from bright minds such as Penn Jillette, Leda Braga, Daniel Dennett, Lasse Pedersen, and David Harding.
In this episode of Trend Following Radio:
The use and misuse of statistics
Using skepticism to your advantage
The advantages of algorithmic trading
Leda Braga on why ‘Black Box’ isn’t a fair term
Daniel Dennett’s simplifications of algorithms and computing
Trend following as simple agnostic rules that can easily be passed to a computer
Efficient market theory failure during surprises
“You want to be a contrarian. You want to be on the other side of the coin. Don’t be with everyone. Stand to the side. That’s where the opportunity is…” – Michael Covel
There is often misunderstanding among the general public when it comes to probability and risk. For example, 20% of Americans believe they are in the top 1% of income earners, or are soon to be there. This is, of course, statistically impossible.
Statistical thinking needs to have a bigger focus in our society, especially since the amount of data we have to deal with on a daily basis is constantly increasing. We need systems to help us sift through the noise.
Today’s episode is a selection of excerpts from some of the brightest minds of today and yesterday, and their takes on systematic and statistical thinking. Michael Covel provides the commentary. Though this is not strictly a trend following episode, all the material is very much applicable and relevant for anyone in trading or business.
From Penn Jillette (of Penn & Teller) to Gerd Gigerenzer, to Daniel Dennett, to Richard Feynman, this episode is permeated with wisdom to help you cultivate a trend following mindset.
In this episode of Trend Following Radio:
Having a foundation, a system to get through the noise
Developing a statistical mindset
Understanding risk and knowing how to deal with it
Getting “under the hood” of any trading system
Richard Feynman’s lecture on computer heuristics
What computer heuristics have to do with systems trading
A trait that geniuses have in common
The importance of isolation and concentration in learning
“The most important thing is to feel about things you should feel about, and think about things you should think about.” – Penn Jillette
You have a trading strategy that works? Prove it. Give me the empirical data. Or you can go this direction:
When people see something they love is under threat, their first reaction is to build an “impenetrable” wall, a Maginot Line–and just to be extra safe they decide to enclose a bit more territory, a buffer zone, inside its fortifications. It seems like a good, prudent idea. It seems to protect us from the awful slippery slope, the insidious thin edge of the wedge, and as everyone knows, if you give them an inch, they’ll take a mile. Dig the moat! Build the wall! And as far out as you can afford. But this policy typically burdens the defenders with a brittle, extravagant (implausible, indefensible) set of dogmas that cannot be defended rationally–and hence must be defended, in the end, with desperate clawing and shouting.
Start with the data. Then clawing and shouting go away.
Source: Dennett, Daniel C. (2013-05-06). Intuition Pumps And Other Tools for Thinking (p. 204). W. W. Norton & Company. Kindle Edition.
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