Algorithms Prove No Match For Market Tumble

from the all-in-the-data dept

Earlier this year, famed inventor (among other things) Ray Kurzweil announced that he was getting set to launch a new investment company that would employ advanced mathematical techniques to discern patterns in the stock market. Of course, just because Kurzweil is widely considered to be a genius, it doesn't mean he'd have any midas touch when it comes to the stock market. Furthermore, quant funds, as they're known, aren't novel. Lately, in fact, they've been getting slaughtered as the market swings about in unpredictable ways. Top tier investment bank Goldman Sachs has announced that its closing one of its premier quant funds in light of recent losses. Obviously computers have become an indispensable tools in modern day investing, but no algorithm or mathematical genius can guarantee good performance in all markets.

Filed Under: algorithm, quant

Reader Comments

Subscribe: RSS

View by: Time | Thread

  1. identicon
    Anonymous Coward, 10 Aug 2007 @ 7:21am

    The problem is in the details

    One possible reason these mathematical models fail in actual markets is in the assumptions made. One of the fundamental assumptions in the Black-Scholes market model is that stocks are normally distributed (that stocks stay, on average, close to a mean price). Anyone who knows anything about stock markets and trading knows this a pretty strong assumption (and could be very wrong), which could explain why so many "impossible" disasters occur in finance markets.

    While I agree that reading markets successfully can take some luck and gut feelings, cold hard algorithms could also do some good, as long as they assume the "right" things about markets. The problem is this: good math models necessarily include more complex assumptions (and so are tougher to analyze) to be more realistic. The key to a good algorithm is finding a trade-off in being realistic and being able to actually do something useful.

Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here

Subscribe to the Techdirt Daily newsletter

Comment Options:

  • Use markdown. Use plain text.
  • Remember name/email/url (set a cookie)

Follow Techdirt
Techdirt Gear
Shop Now: I Invented Email
Report this ad  |  Hide Techdirt ads
Essential Reading
Techdirt Deals
Report this ad  |  Hide Techdirt ads
Techdirt Insider Chat
Report this ad  |  Hide Techdirt ads
Recent Stories
Report this ad  |  Hide Techdirt ads


Email This

This feature is only available to registered users. Register or sign in to use it.