The economist; staffed by statistical buffoons?
I came across this in one of the Economist’s “Free exchange” blogs: (via NP)
The funny thing is that according to Sebastian Mallaby’s new hedge fund history, “More Money Than God”, the willingness to explore unexplained correlations is what sets Renaissance apart from other quant funds (full disclosure: Mr Mallaby is married to The Economist’s Economics Editor). Where other funds might recruit employees with financial or economic backgrounds and have them test hypotheses against data, Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm’s advantage is in its willingness to trade what doesn’t necessarily make sense.
One of the many truly funny things about this is the implication that, say, some dude with a financial or economic background is better at hypothesis testing things than a physicist or applied mathematician. Here’s a thought for “R.A.” -maybe scientists think to look for actual -rather than spurious correlations in places that economists don’t? And maybe they don’t look for spurious correlations in places economists insist they must be? Economics isn’t much of a science; I’d characterize it as somewhere around the four humor theory of medieval medicine. Not completely wrong, but not particularly right either, and a gratuitous over simplification of how things really work. The type of reasoning that goes into it isn’t necessarily wrong, but it’s obviously pre-scientific. Some medieval doctors were probably very good doctors, and some traders are probably very good economists, but it’s a lot easier to pick a good medieval mathematician than it is a good medieval doctor. And you know you could train the math guy to be a doctor. That’s kind of the idea of hiring science nerds to do applied economics.
Does RenTech preferentially select people without financial knowledge? Yes, I know for a fact that they do, because a former Medallion alum laughed uproariously at the fact that I was taking the CFA (I didn’t bother taking the test in the end: thanks, doc: you saved me some money). Does that mean they bet on things like astrology applied to futures markets? I kind of doubt it. In a real science, people like to get the right answer: not the ideologically correct answer. That’s why RenTech hires scientists, and people like Natural language translation experts. There is a right answer, and those people are the types who go out and find it, based on minimal clues.
But having the guts to trade relationships no one else can understand or explain would be one way to consistently beat the market over a period of two decades.
Um, no; that’s how you lose all your money in two weeks.
One of the many horrible things about reading this sort of thing: The Economist is probably the best magazine in the world. Read by leaders, diplomats, CIA operatives, and bigshots the world round. If they’re this laughably wrong in such a simple matter, how can you believe anything they say? I mean, why would anyone think RenTech looks like a Thomas Dolby video?