Posts Tagged ‘bias’

Intelligence is NOT Normally Distributed

April 20th, 2010

At first glance, it seems as though a person’s IQ would be a reasonable proxy for intelligence. The faculties tested – pattern matching, logic, spatial recognition, etc – are strong tools for grasping truths, relationships, facts, and meanings. However, viewing them as tools illuminates an important caveat: tools must be used, properly wielded, and maintained.

Now, assume that the genes and biologically relevant environmental factors that are responsible for innate intellectual capacity are effectively independent. I am neither an expert in biology nor genetics, but this seems like a reasonable assumption (see note below). Elementary statistic will show that the distribution of the product (or sum) of n normally distributed variables is normally distributed. Hello, bell curve.

However, it is one thing to assume the biological factors responsible for innate intellectual capacity are independent. It is an entirely different matter to assume that the non-biological factors of intelligence are dependent on neither the biological factors nor time, effort and accumulated knowledge!

Employing reductio ad absurdum and the Einstein as the poster-child cliché: what would Einstein have been if he was isolated at birth with no social interactions or mental exercise offered? Again, I am not an expert psychologist, but I think it is reasonable to think that he would not have amounted to much – and would probably have been insane.

Without stimulation, your mind will atrophy. With a predominance of erroneous information feeding your mind, it becomes diseased (in the abstract sense.) Having strong biological machinery may be a necessary precondition for being “very smart,” but it is certainly not a sufficient condition. I do not think I am conflating knowledge with intelligence. The ability to learn — to grasp truths, relationships, facts, and meanings — is conditioned upon an individuals existing knowledge. If things that are taken as given are erroneous, errors ensue. Errors have a tendency not only to accumulate unculled, but given intellectual path dependency, results in a higher probability of accepting more falsehoods as truths.

As intelligence is conditional upon many factors chained together, it is more gamma than Gaussian. There are far more dumb people than polite company cares to admit; there are also very few very intelligent people. Contrary to what I often prefer to think there are intellectual giants. They exist at the intersection of favorable enviroment, genetics, motivations, and opportunities. Feynman was not only smarter than I am now; he was smarter than I could potentially ever be.

Note: Some prominent geneticists have suggested that intelligence may be geographically and racially dependent. These people are usually lambasted — promptly.  Even if this was found to be true, I don’t think the deviation between means would be large enough to matter.

P.S. This post was not me saying IQ tests are useless. My IQ is big. Ladies, you’ll love it.

P.P.S. I started writing this a while ago in response to a friends politically charged assertion, “Democrats are Smarter than Republicans.” Initially, this was a private email response to him. However, I became more interested in the non-political part of my response (i.e. IQ is not normally distributed.) I made my politically-oriented part — Democrats are Smarter Than Republicans — into a seperate post in an attempt to maintain the integrity of my central thesis while lessing the probabilty of Goodwin’s law asserting itself.

To Iterate is Human, to Recurse, Divine

November 30th, 2008
Escher's Hands

Escher's Hands

I have a fancy for functional programming languages; I find recursion intuitively elegant. However, in my mental processes, recursion seems to be a dangerous flaw.

This trade may return 5% if event A occurs-> This trade could return 10% if event A & B occur -> This trade could return 20% if event A & B & C occur -> Well, this trade has returned 20% and now people are going to pile one and it could return 30% -> … -> This trade could return 1,000,000%.

My mind selectively traverses the path on the recursive tree that is most favorable while ignoring the (huge) selection of paths that do not lead to the favorable end-node. Even worse, I forget the necessary conditions that lead to the selected outcome! A favorable outcome is pleasurable and I am a pleasure-seeking animal; It seems that this also applies abstractions.

Furthermore, the recursive thought seems to lack a terminal condition. Instead of building a balanced tree of possibilities, the favorable path gets many more steps, leading to a gross asymmetry. My mind stops traveling only after it has exhausted mental resources.

Mental recursion is dangerous without continuous checks.

* Note to the non-programmer: The title of this entry is actually an oft-repeated L. Peter Deutsch quote.

Lessons Learned from Hot Girls

November 17th, 2008
XKCD #55

XKCD #55

In high school, I managed to score a date with the lovely Jess Gore.

She was far above me on the adolescent social ladder. I was the excessively introspective, semi-nerdy guy with hair that resembled hedgehog spikes (I wasn’t trying to be rebellious; I genuinely thought it looked good); She was the elegant (to the extent that you can be elegant as a teenager anyway), quietly rebellious girl without physical flaw (except for her ears which were perpetually red, but I found that oddly charming.)

Being that I had very little “game” (that’s being kind) back in high school, the entire matter was simply a consequence of a favorable situation. I was placed into a project group where she was one of the members. While working on the project, I got bored (as I am prone to do given a forced faux-intellectual venture) and suggested that we (the group) go grab food. Our other group partner was of the anal-retentive variety and opted to stay in the library to find other sources. (She deemed the suggested number of sources inadequate for our advanced 11th grade abilities.) Jess, who was apparently bored as well, chose to leave with me.

Back then, I never thought about social situations; As I said, I was excessively introspective. So when she had me bring her home first so that she could change out of her group study attire and emerged wearing something that I would describe as datish (yes — I did just say datish), I was confused.

As a consequence of my confusion, I grew progressively awkward as we moved through what I began to view as a date. (In retrospect, it definitely was a date. Or at least, I’d prefer to pretend it was.) This opportunity was unprecedented in my testosterone-dominated mind and I did not want to risk making a mistake. To prevent such a loss, I added (too many) judgemental filters to my behavior and my mind was not able to effectively cope with the stress. (It still is incapable of doing this but, thankfully, I have very few behavioral filters anymore.)

Censoring your actions and behavior makes you look filled with self-doubt. Confidence is ridiculously sexy; Self-doubt is not. She clearly could see that I was not acting like myself. The social instincts of women are superior to men; We are insects by comparison. She grew visibly less interested. Thus, I missed what would have been a very large opportunity at the time.

What is the point of this story? My mind has irrational artifacts. To this day, I am incredibly awkward around Jess, even though she does not in any way intimidate me. (I am for the most part socially arrogant; Almost no one intimidates me anymore.) This pattern also holds — albeit to a lesser degree — for other girls that I idolized in high school. It seems that my perceptions are layered; The old socially jittery version of myself still exists and somehow has pre-emptive rights to my actions. I can recognize when I am acting this way but, ironically, it requires effort to be myself!

If this is true, than the layers bellow high school horny also play a role in my decisions. This is probably a convoluted way to think about fear and greed, but it helps me. I still cannot hold a five-minute conversation with Jess Gore because of some old irrational mental fragments. Therefore, I try to recognize that the attractiveness of a trade may be due a lot more to irrational (in the context of trading) mental processes than the brilliance (har har) of my analysis.

…I suppose I am still a bit excessively introspective.

Momentum is Instinctual

August 29th, 2008

One of the earliest trading programs I wrote (circa sophomore year of high school), traded on momentum. It acted quiet naively which is a proper reflection of my mind at the time. If the slope of the price for an asset was greater than and less than some prespecified values the asset was bought until it was lower or greater than a terminal slope value; The inverse applied for shorting. My program then searched for the best combinations of entry and exit slopes over a range of different historic windows.

I was quite excited at first when I found some bots that did extremely well. Then I had the insight to try testing the bot on a different time period to confirm they did just as well; They did not. I am actually proud that I recognized the need for out of sample testing. I think at the time the math taught in my connections class (read: dorky kids) was trig/precalculus. I had no knowledge of statistics outside of averages.

The point to take away from this experience was my sixteen year old brain’s expectation of herding behaviour; It is instinctual. Behaviour finance expounds on this concept. At my young age I believed that if a stock was moving up, people would pile on; If a stock was moving down, people would abandon ship. Eventually, the fundamentalists would correct very large errors, but in the short term, I thought the technical traders set movements.

Currently, I believe that momentum is a huge factor for a certain class of trader; This class is not sophisticated. It may be possible to exploit their actions, or their likely actions, but since they probably dominate only over the short term, their is too much noise relative to signal.

Some people (in this case momentum traders) behave in a predictable way. This capacity for prediction does not mean profit. Predicting the movement of one fish in a school does not mean you know the school’s trajectory — although it might give a hint that is occasionally correct.

I Am a Gluttonous Trader

August 28th, 2008

In addition to being a promiscuous trader, I am a glutton. Not only do I trade too often, but I risk too much of my equity on each individual trade. Perusing my trades from last year, I noticed that eighty-percent of my losses came from about 10% of my trades. It was not that these trades were placed in volatile periods or held for longer than my typical trade but that they represented huge chunks of my equity; Two trades were actually my entire stake!

I believe I do this — stake too much — because I often believe opportunities to be ephemeral; I want to capture profits before my edge disappears. Sometimes, the opportunity may truly be fleeting and should be quickly seized, but the associated mental sloppiness comes at too high a price; It makes me act impulsively.

Furthermore, I sometimes think “well…this could go to point X for Y% return and that would be Z dollars”; This is the antithesis of rationality and discipline. Yes, the asset could move to point X; It could also move to point -X; It could also move to point -2X. I get risk blind when the profit potential is glaring and risk blind people are craps players.

Eventually, I will use more sophisticated methods to quantify risk and lower it appropriately but for now, I am going to intellectually cop out and choose to implement yet another simple rule: Assume each trade is going to result in a 100% loss and limit each trade to 5% of my capital.

I Am A Promiscuous Trader

August 27th, 2008

I spent the morning looking through my trading history for the past year; It was glaringly obvious that I traded too much. As this is one of the most abused platitudes in trading circles, I will expound upon my particular offense.

Obviously, you cannot say from frequency of trade alone that you are “over-trading”. What is too much for one person or team is not necessarily the same for another. People have different capabilities. However, you can state unequivocally, that if action is taken on nearly every asset reviewed, you are a promiscuous trader. The reptilian part of my brain seems to chase every spark.

The problem with promiscuous trading is not the quantity of trades, but the resulting quality of the aggregate. I noticed that occasionally, I came across trades that seemed too good to be true — but were proved correct. You can argue that I am revising my history, but I should point out that I keep notebooks of all my trades and, looking back at them, the major successes almost always had something along the lines of “VERY GOOD PLAY” scribbled at the conclusion of my analysis. However, these trades make up the minority of my history. The majority of my fills were stocks I looked at, chose a direction, and placed my order. This is promiscuous trading — taking any action because it is available.

At this point in my education, I am not convinced that I have the emotional iron to prevent promiscuity without a set of established rules. Therefore, I am setting the following hard rule: At most I can make one trade every two weeks. Obviously the potential for promiscuous trading still exists (e.g. if I only look at my options once every two weeks) but at least it is somewhat mitigated by my unrelenting interest in the market. I will still take a side on every asset I review, but only send orders on those I feel very strongly about. I will be half paper-trading (for promiscuity’s sake) and half real-trading (for my reptilian brain’s sake).

I Am Relatively Unintelligent

August 27th, 2008

Compared to the average quantitative analyst, I am unintelligent. To be more accurate, I should say I am less experienced and educated; I believe myself to be of equal innate intelligence and discipline but several years to the left of their capabilities on a time line. The confidence I have in my intellectual faculties might be hubris, but for now I am concluding that it is not unfounded.

Given my current stage in intellectual maturity (intellectual adolescence?), I must admit to myself that, in all likelihood, my efforts at trading will presently be unfruitful (as they have been in the past). I am developing my mathematical skills, but they still lag behind; I read much on history (not only economic), but it is likely to be insufficient at this point. Furthermore, the vast majority of academics — who are also more educated and experienced than I am — assert that trading is a ill-advised adventure; You can not beat the market, you can only take on more risk. Some traders may appear successful, but they are just the lucky ones who happen to land on the far right tail.

So where does this leave me?

I respect (highly) the elegance of modern portfolio theory. A sizable part of my mind has already concluded that it is far more rational to build long term portfolios than to pursue the path of active trading. This is the same part of my mind that gets angry when people buy $29.00 in lottery tickets as I wait to buy my pack of Tear ‘n Share Peanut M&M’s.

On the other hand, I am wary of the conclusions drawn by the academic field concerning the efficient market hypothesis. The majority of studies make heavy use of long term historical price sets; I do not believe that valid inferences can be drawn on these data. Given my own experience, I believe this type of study suffers from, at the same time, too much and too little information.

Furthermore, the reptilian side of me that not only is overconfident but also craves the stimulation that trading provides, still harbors the illusion that I can be a successful trader. I have been interested in investing err, speculation) since I was very young — around five to be precise. There is nothing I enjoy more.

So, probably foreshadowing failure, I choose to stay the course because I believe in my own abilities and am skeptical of the conclusions of the EMH; I am relatively unintelligent but I believe myself to be more capable then those above me.

This does sound like hubris, no?