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May 2 - May 9, 2020
buying and selling infrequently magnifies the consequences of each move. Mess up a couple times, and your portfolio could be doomed. Make a lot of trades, however, and each individual move is less important, reducing a portfolio’s overall risk.
“We’re mediocre traders, but our system never has rows with its girlfriends—that’s the kind of thing that causes patterns in markets.”
“What you’re really modeling is human behavior,” explains Penavic, the researcher. “Humans are most predictable in times of high stress—they act instinctively and panic. Our entire premise was that human actors will react the way humans did in the past … we learned to take advantage.”
No one ever made a decision because of a number. They need a story.
“We make money from the reactions people have to price moves.”
Some employees seemed embarrassed by their swelling wealth. As a group of researchers chatted in the lunchroom in 1997, one asked if any of his colleagues flew first-class. The table turned silent. Not a single one did, it seemed. Finally, an embarrassed mathematician spoke up. “I do,” he admitted, feeling the need to offer an explanation. “My wife insists on it.”
By 1997, Medallion’s staffers had settled on a three-step process to discover statistically significant moneymaking strategies, or what they called their trading signals. Identify anomalous patterns in historic pricing data; make sure the anomalies were statistically significant, consistent over time, and nonrandom; and see if the identified pricing behavior could be explained in a reasonable way.
