11–20 of 61 posts
Is this really surprising? I would have thought this would be self-evident as these kinds of models would seem to be highly chaotic. It's really no different than the meteorology simulations in the 60's that first discovered the butterfly effect. http://en.wikipedia.org/wiki/Butterfly_effect#Origin_of_the_...
I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect model for the market without you applying your model, as soon as you start applying it, the market changes... and this is also true for all the other quants who do the same with their models. IMHO, it was much better when most stock market decisions were mostl…
Actually, most trader's models do take market impact into account. If you had a perfect model for the market, I'm pretty sure that you (as a participant) would be included. In fact, your own actions are the easiest part of the model to get right, because you control them entirely.
http://en.wikipedia.org/wiki/Overfitting
It is quite a newbie mistake for a scientist to be surprised by it. It affects every kind of modelling.
I thought maybe this article would talk about why economic models are worst than other kinds of models. There are issues that arise when applying scientific models to the economy caused by the fact that when even good models are used to predict markets, the use of the models themselves to do trading, distorts the markets. When multiple parties use good models to compete in markets, they distort the markets in such a way that destroys the predictive power of the models.
There is a great explanation by Glen Whitman of Agoraphilia, that uses grocery line wait time predictions as a metaphor for this:
http://agoraphilia.blogspot.com/2005/03/doing-lines.html
See also:
Earlier quoted context omitted.
I've thought there was more opportunity in fundamentals up until Warren Buffet and Ben Graham's the intelligent investor became well known. More people tried to use these methods, thereby increasing demand and decreasing the upside on securities that meet Graham and Buffets criteria. The stock market today is very different from when they got going, although long term I don't know that anything has fundamentally chan…
Wait, if there was more "opportunity in fundamentals" back then it would mean that stocks were further away from their fundamentals, right? That's pretty much the opposite of what the OP is complaining about.
Can you really compare Economic models to Physics models without discussing the simplifications necessary to create an Economic model?
You usually have to make a large number of simplifications to create a Physics model too. The question is how those simplifications change the accuracy of the model. "Essentially, all models are wrong, but some are useful" -George E.P. Box
I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect model for the market without you applying your model, as soon as you start applying it, the market changes... and this is also true for all the other quants who do the same with their models. IMHO, it was much better when most stock market decisions were mostl…
You might be fooled it says something useful if you don't know what a 'model' means in any science.
So what is the point of the article? The author is trying to sell you his book where he most probably makes people who don't know anything about economics feel good or push an ideological agenda.
I think what the author is describing is simple overfitting. http://en.wikipedia.org/wiki/Overfitting It is quite a newbie mistake for a scientist to be surprised by it. It affects every kind of modelling. I thought maybe this article would talk about why economic models are worst than other kinds of models. There are issues that arise when applying scientific models to the economy caused by the fact that when even g…
I think radical underspecification is much more likely than overspecification, really.
(Since I encounter this a lot, let me pre-answer one question in advance, which is "What if only 300 bits really matter and the rest don't matter as much?" and the answer is that the term bit in information theory encompasses that idea already. If you have ten "bits", but they tend to be highly correlated together such that they are usually all 0 or all 1, you in fact don't have ten bits in information theory. Ten bits are, by definition, ten fully-independent true or false values. Bits-in-memory are not the same as information-theory-bits. A real system with 10,000 bits can not, pretty much by definition, be modeled by 100 bits. If it could, it would be a system with only 100 bits in the first place. Information theory cares about the true degrees of freedom available, not about your particular representation of the system.)
All models are wrong. Some are useful.