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  • Closing the gap between behavioral science and business

    It is a strange time to be a behavioral scientist in business.  When I left my PhD program almost ten years ago to focus on real-world applications, I spent the majority of my first few years explaining over and over what behavioral scientists actually did.  Now, I regularly get inbound requests to speak at large… Read more…

    Closing the gap between behavioral science and business
  • A Pom Discovers The Ute
  • Momentum overpowers value investing in Aussie market

    This piece in the AFR is currently doing the rounds with various people trumpeting that this is what they do so they are a genius. To be fair without actually seeing the original Morgan Stanley report or understanding what they did any comparison between different methodologies is profoundly limited in its utility.  

    Momentum overpowers value investing in Aussie market
  • Where Is The Money?

    One of the frustrating things about being a trend follower is that it takes time to overcome the inertia of a new system, particularly if that system is based upon slightly longer time periods such as weekly data. Part of the frustration that traders encounter is based upon the simple mechanics of how systems work.… Read more…

    Where Is The Money?

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Closing the gap between behavioral science and business

It is a strange time to be a behavioral scientist in business.  When I left my PhD program almost ten years ago to focus on real-world applications, I spent the majority of my first few years explaining over and over what behavioral scientists actually did.  Now, I regularly get inbound requests to speak at large companies and books by Adam Grant, Dan Ariely, Jonah Berger, Angela Duckworth, Amy Cuddy, Barry Schwartz, and others sell millions of copies.  Executive confidence that behavioral science is both valid and interesting has seemingly never been higher.

And yet hiring behavioral scientists to explicitly apply what they know has remained somewhat rare.  When I left Microsoft, I got far more recruiter inbound based on my background in startups and venture than I did in behavioral science, despite being considerably better at the latter.  And while there are a few corporate behavioral science groups, like Om Marwah’s burgeoning team over at Walmart, Steve Wendel’s at Morningstar, Charlotte Blank’s at Maritz, Prasad Setty’s at Google, and Jeff Helzner’s at AIG, by and large the Fortune 1000 seems to love behavioral science without actually applying it.

There is a fundamental gap here.  How can executives believe in behavioral science, espouse its virtues and recommend its writings, and yet not be investing in its application to their own companies?  Surely it can’t be all TED talks and no desire to see it work?

More here – Matt Wallaert

A Pom Discovers The Ute


 

Momentum overpowers value investing in Aussie market

This piece in the AFR is currently doing the rounds with various people trumpeting that this is what they do so they are a genius. To be fair without actually seeing the original Morgan Stanley report or understanding what they did any comparison between different methodologies is profoundly limited in its utility.

 

Where Is The Money?

One of the frustrating things about being a trend follower is that it takes time to overcome the inertia of a new system, particularly if that system is based upon slightly longer time periods such as weekly data. Part of the frustration that traders encounter is based upon the simple mechanics of how systems work. A system that is correctly designed takes its losses quickly and allows its profitable trades to simply roll along. This results in the system instantly going into drawdown and it is this drawdown that causes traders to develop friction with their system. This friction often leads to tinkering as they attempt to force the system to give them something it cannot give. This is exacerbated in times of a flat market – you cannot force returns from a market. The All Ords of late has not really been a stand out performer as can be seen from the chart below the market has been slowly grinding its way up in a broad channel.

Ords

With this in mind I thought I would look at the yearly returns for the various stocks within the All Ords – so I found some data on their percentage returns and stuck it into a frequency histogram to see what the performance of individual stocks looked like.

Frequency

I have a arranged the data into a serious of blocks and did a count of the number that fell into that category. I also calculated the average performance of the group which for this period stood at 17.09%. However, if I drop out the 200% and above outliers this average value falls to 13.04%. As you might have guessed the majority of values cluster around the mean with a long right handed tail. This sort of distribution is common with stocks since we have unlimited upside but limited downside – a stock cannot decline more than 100%. Our psychology dictates that we are instantly drawn to the right hand side of the chart and the extreme outliers that occurred over the past year. And as traders these are the sort of trades that we hope ours might evolve into. However, in doing so we ignore that left hand side of the chart. The majority of stocks (60%) have below average performance. You may assume as a trend follower that this is not an issue since you would avoid these large losses and poor performance by the use of stops but that ignores the reality of the actual trading process. As a mechanical trader you will not incur these losses but you will burn time wading through these non performing stocks before you hit the ones that do perform. You waste time, a little bit of money and a lot of patience dealing with this mediocre performance.

My anecdotal experience has been that trading returns are made up of a lot of modest returns and a tiny handful of trades that do very well but to get to the ones that do very well you have to crank through a reasonable number of trades and you have to keep going. This is where the notion of emotional resilience comes into its own in trading and the ability not to tinker with the system hoping that it will generate these sorts of trades. Systems dont actually generate these sorts of trades – the market does so you cannot actually build a system with the preconceived notion that it will find you trades that generate a 500% return. What the system does do is generate a population of trades, most of which will be duds and hopefully a few large winners. But in the beginning all trades look the same.

 

GBP Flash Crash Investigation Report

On October 7th 2016 the GBP suffered a minor aneurysm and dropped like a stone for a short period of time as seen below.

GBP_USD 5 Min

The Bank of International Settlements had just released a report into possible reasons for the crash. You can download the full report here.  The executive summary  outlines a constellation of  reasons for the crash –

A number of factors are likely to have contributed to and amplified this market dysfunction. In particular, significant demand to sell sterling to hedge options positions as the currency depreciated appears to have played an important role. The execution of stop-loss orders and the closing-out of positions as the currency traded through key levels may also have had an impact. A media report released shortly after the move began, which would have been interpreted as somewhat sterling-negative, is only likely to have added marginal weight to the move as it did not contain new information. These factors appear to have contributed to the mechanical cessation of trading on the futures exchange and the exhaustion of the limited liquidity on the
primary spot FX trading platform, which encouraged further withdrawal of liquidity by providers reliant on data from those venues.

The presence, outside the currency’s core time zone, of staff less experienced in trading sterling, with lower risk limits and risk appetite, and with less expertise in the suitability of particular algorithms for the prevailing market conditions, appears to have further amplified the movement. Other factors such as ‘fat finger’ errors and potential market abuse cannot be ruled out, but there are little, if any, hard data to substantiate them.

The report is actually an interesting read if only from the perspective of educating traders as to how liquidity can slip even in a market as large as FX due to changing time zones.. The data below gives an interesting insight into how you can have a period of high trading activity combined with relatively low liquidity as markets shift time zones.gbp liquidity

Another Day At The Office


 

More On Being Wrong

There’s an academic I know — very well respected — who especially values one of his collaborators. This particular colleague isn’t invaluable because of his creativity or intellect, says my professor friend, but because “he is willing to tell me when I’m wrong, and that’s rare”. It is indeed rare. Perhaps even rarer is the practice of seeking out colleagues because they give frank criticism.

I certainly don’t enjoy being told that I’m wrong. And it seems that I’m not alone. A recently published working paper from Paul Green and Francesca Gino of Harvard, and Bradley Staats of the University of North Carolina, caught people in the act of avoiding criticism. The particular kind of criticism that interested the researchers was where I think I’m doing a good job, and then you tell me that I’m not. (In the jargon, this is “disconfirmatory feedback”.)

Green, Gino and Staats looked at data from an internal peer feedback process in a medium-sized company over several years. They were able to show that when disconfirmatory feedback arrived, workers would then avoid contact with the people who had given them the unwelcome comments. This is the exact opposite of my professor friend’s behaviour — but, I think, a much more typical response. We don’t like it when people tell us that we’re failing.

More here – Tim Harford

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