Biggest Challenge is Convincing People NOT to Trust Their Judgment

As the amount of data goes up, the importance of human judgment should go down… We should turn many of our decisions, predictions, diagnoses, and judgments—both the trivial and the consequential—over to the algorithms. There’s just no controversy any more about whether doing so will give us better results.

–HBR

We have been discussing Behavioral Investing on our blog for a while now and whats fascinating is that study-after-study shows that humans are the worst decision makers out there. We have the mind of a Lemming, we over trade, and we fall for stories.

Entrepreneurs are often advised to write their business plan on pen and paper. They may not have a profitable plan, but the very act of writing something down clarifies thoughts. To act clearly and rationally, it seems, we need to write a program. The very act of programming an investment strategy leads to a deeper thinking and clarifies risk, uncertainty and reward.

In fact, 2 out of the top 5 performing Investment Themes have been quantitative portfolios.

Models beat experts. Models represent a ceiling, not a floor. Humans with a model improve performance, but underperform the model. Humans without a model are ineffective. Following a model, but then trying to add value via intuition, actually destroys the model’s benefit and causes investors to under-perform the market. Experts need to design the models, but COMPUTERS NEED TO IMPLEMENT THE MODEL.

–Turnkey

Investors should focus on writing a better model and developing the courage to allow it to do its job. If it fails on pre-defined statistical measures, debug the model and try again.