BarroMetrics Views: High Maths and the Trader

Due to a recalcitrant  nature, my secondary education was sadly lacking so far as  physics, chemistry, alegbra, arithimetic and geometry were concerned: from Form 1 to Form 5, I never passed a single exam in those subjects. Indeed, I had to ‘escape’ to Sydney to have a chance at University. Once there I turned over a new leaf, and managed an  ‘A’ in General Maths in the Leaving Certificate.

Unfortunately, General Maths did not equip me for understanding even basic statistics and probability. It was only after I read Derek Rowntrees’ ‘Statistics Without Tears‘ and ‘Probability Without Tears‘ that I found my way around the necessary maths I needed for trading success.

But my lack of a maths background did have a positive side effect - I learned to question the assumptions behind the maths I was learning. Hence, I never fell for some common illusions, e.g.:

• that market data forms a Normal Bell Curve and
• that three standard deviations means an occurrence of less than 1%.

This means that from the beginning, I looked for alternative ways to assess low probability events. I avoided any idea that was based on some ‘abstract’  assumptions (i.e. assumptions not based on reality). And this meant that I gave certain areas a miss: options trading, Value at Risk etc.

Now a book written by Pablo Triana, (Lecturing Birds on Flying: Can Mathematical Theories Destroy The Financial Markets?), suggests that most of the popular quant theories have feet of clay - Black Scholes, Value at Risk …… They are based on invalid assumptions and the biggest misconception is the nature of humans - the maths theories make assumptions that make it easy for the proponents not because they are true.

(By the way, this is the reason I favour Austrian economics ahead of other ideas. It is based on the presupposition that ‘humans act’; and because human action has a strong emotional component, it does not lend itself mathematical dictums).

Now Triana has validated my ideas.

I recommend the book to all traders - not because I agree with its ideas (G) but because it is formula free (thank goodness -  if I can understand the ideas, anyone can). Triana’s work is also logically coherent and he makes a compelling case for his views.

By the way,  an interesting piece of trivia: did you know there is no Nobel  Prize for Economics? ( I didn’t).

Alfred Nobel provided for prizes in Medicine, Chemistry, Medicine, Literature and Peace.  The Nobel Price for Economics was created by the Swiss Central Bank and since 1969 this prize ‘has been lavished on people with zero practical experience … and for contributions that are entirely theoretical, that on occasions have resulted in dramatically negative real-life outcomes, and whose awards-sanctioned lauding can encourage unsavoury behaviour.‘

If that does not arouse your curiosity, nothing will!

Refer this blog post to a friend or colleague…