Ecoinometrics - Asymmetric opportunities

Why you have to be systematic.

You look at the data, you do the analysis, try to estimate the odds and build that up into some systematic rules for making asymmetric bets.

But even after you’ve done all that work, you’ll often be tempted to override the rules.

Here is why you should not.

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Asymmetric opportunities

Today we are taking a break from discussing the latest data to touch on something high level strategic point I think is important: why you need to be systematic when taking on asymmetric bets.

It isn’t always obvious why deviating from the system is a bad idea. So to make my case let’s look at a kind of strategy for which this is easy to visualize the issue.

Let’s take the classic trend following strategy which is in essence an asymmetric bet setup.

If you go back 200 years worth of various commodities prices, exchange rates, stock prices and so on there is a phenomenon you can observe that has always been there: a lot of markets tend to trend.

That is prices don’t just absorb some new information immediately and jump to a new price that would satisfy the efficient market hypothesis. This is simply not how it works.

Market react slowly to large changes and that gives rise to trends.