A few years back I started studying quant-based systematic investing. This was much before Jim Simons and Ed Thorp were made famous by their respective biographies. One of the reasons I started looking at it was, in my experience, behavioural biases impact success in investing the most. Having rules which are thought through and tested for various scenarios help a lot in navigating challenging times when doubts creep in about what to do.
This article in Harvard Business Review articulates why rules are probably a good idea.
The problem is that humans are unreliable decision-makers; their judgments are strongly influenced by irrelevant factors, such as their current mood, the time since their last meal, and the weather.
It has long been known that predictions and decisions generated by simple statistical algorithms are often more accurate than those made by experts, even when the experts have access to more information than the formulas used. It is less well known that the key advantage of algorithms is that they are noise-free: Unlike humans, a formula will always return the same output for any given input. Superior consistency allows even simple and imperfect algorithms to achieve greater accuracy than human professionals.
Thought of the Week
“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise.”
~ F. Scott Fitzgerald