Thread by @lightspringfox

Figured I would compliment the shitposting with some thoughts. This meme was based completely on a true story. People talk a lot about mental game for discretionary traders, but mental biases for quants are under discussed in my opinion. (1/n)

https://twitter.com/lightspringfox/status/1415535988982517760

1. Confirmation bias w.r.t simulations: How often do you look for bugs in your backtesting framework when performance looks good vs bad? When performance looks bad the inclination is to peruse the code. When things look good, ignorance is bliss. (2/n)

Net effect: Your bugs will always be selected to bias results upwards, unless you make a habit of unit testing each component. This mechanism can be quite insidious over time in a complex backtester. (3/n)

2. Endowment effect w.r.t ideas: You have a new alpha. You write super elegant code to implement. It's beautiful. The problem: it just doesn't make money. (4/n)

Here, the impulse is to try to save the idea. What if I turn the signal off when rolling metric X drops? What if I spend 2 days tuning the hyperparameters?

At best you waste time, at worst you are going to overfit. Sometimes you have to force yourself to move on. (5/n)

3. Bias for complexity: This brings us to the origin of the meme. We take pride in being smart. We value sophisticated systems.

You have to ask yourself the question: How does the most naive possible version perform in this regime relative to what I built? (6/n)

Gut instinct is that the naive version can't possibly work if the "smart" version isn't working. Very well might be true.

But test it anyway. It's better to be humbled than to lose money. (7/n)