The New York Times Defines ‘Physics Envy'

Recently there has been discussions about 'Physics Envy’ at P123.

But what does ‘Physics Envy’ really mean?

Here is the much respected NY Times on the subject: Overcoming ‘Physics Envy’

The NY Times authors do not like: “hypothetico-deductivism.”

They use jargon to make this sound scientific—maybe more scientific than those physics guys. Nice trick.

Jargon aside they mean that they do not like you developing an hypothesis and then testing that hypothesis in some way (with or without math).

Simple as that.

Me. I think the Renaissance was mostly a good thing. It was nice to see an end to the Spanish Inquisition (yes I am old enough to have been there).

P123 allows one to test an hypothesis and that is its strength. That is why I signed up.

Even an over-optimized backTEST is better than no TEST of an hypothesis at all, IMHO. That is not to say we cannot do better.

There is much to criticize about over-optimized backtests. We should move forward in time–with regard to western thought—to address this real problem. Not backward.

-Jim

“Jargon aside they mean that they do not like you developing an hypothesis and then testing that hypothesis in some way (with or without math).”

Christopher Columbus had a hypothesis that he could find a passageway to India. He tested it and low and behold we had Indians living in America. And we live in America, not Columbus-land because to his dying day he could never bring himself to admit that he had discovered a new continent instead of the passage to India.

SteveA

And ultimately we learned something. No one said the scientific method gets it exactly right the first time. Newton’s theories of gravity came before Einstein’s General Theory of Relativity. I wonder in fact, if we can ever get it exactly right.

I am glad you are posting from “the New World” in Canada.

Thank you for making my point even more clear SteveA!!!

You literally would not exist without the scientific method you describe above–as you correctly point out. At best it would be a little more crowded with both of us living in Europe. I am not sure Georg could take me living next door (my grandfather is from Germany;-).

-Jim

Yes, Jim - the point is that someone made a hypothesis, tested it and apparently substantiated it in his own eyes. Yet the hypothesis was completely wrong. That is my point. Were great strides made as a result? Yes, but not in trade with India. So if you want to pursue such a strategy (hypothesis->test) then go for it! But you may end up trading a system that arrives in America instead of India.

There are many problems with the strategy of starting with a hypothesis, the primary one being that it introduces a bias in your thinking. There is a tendency to throw out evidence that doesn’t support your hypothesis while promoting evidence that does. In the end, the only thing that counts are trading results. And quite frankly, there is a strong probability that your results have little or nothing to do with your original hypothesis. But if it makes you feel good then go for it.

SteveA

Thank you SteveA.

I am just saying, in the words on Monty Python: “Nobody expects the Spanish Inquisition!” Especially from the forum of a quant investing site.

BTW, Python (the program) got its name from Monty Python not the snake. And the solution for some of us who would like to use more of the scientific method is Python. Even if it is the technical factors that the data providers do not limit so much.

Weird that.

Anyway good to see that I do finally understand the source of the debates here at P123. Glad the post is not a side issue here at P123. Indeed, it is the central issue of most of the debates it seems.

But I am not being fair. They used the scientific method during the Spanish Inquisition. They knew that if you throw a witch into water they will float. It is not like they did not know to test their hypotheses even then.

I appreciate your post and the more you want to debate the scientific method the better as far as I am concerned. I hope you do not mind me bringing Monty Python into this.

Very much appreciated.

-Jim

Steve,

I don’t think hypothesis are problematic in themselves but rather human nature. If you truly tested a hypothesis you would include all known information and not throw out that which is inconvenient. Physics strives to not throw out the conflicting information but rather to use it to develop better hypothesis. Unfortunately humans are biased and more often than not have a tendency to succumb to confirmation bias by minimizing that which disagrees and maximizing that which agrees (how are more than 50% smarter than average or do gamblers win more than they lose?). Having an engineering background, how many times do you see engineers and especially management fixate on a narrative? I see it quite often. Granted I have my own biases but I do try to let the data drive at the end.

With trading I think hypothesis can be of value but it is not physics and is much fuzzier. I think that’s why statistics is actually of much less use in economics and finance than people would like it admit. You have formulated hypothesis and are testing them in real time. This is evidenced by supposing that cloud computing and aerospace/defense will outperform due to technological and political factors. You have to start somewhere and that means a hypothesis otherwise you are just reaching in the dark for patterns which may or may not be real and that is even more dangerous. A hypothesis at least encapsulates a level of reason.

Jeff

But at least the AI on my phone could have gotten him to India. The analogy can only be taken so far.

I still say many of us exist because of the scientific method. Anyone ever taken an FDA approved drug?

Anyway I am guilty of using a backtest to test an hypothesis.

I love how people know exactly how to use the scientific method and want to limit the silly ideas others have. Nothing else is any good. SteveA is actually not so vocal on limiting others so that does not apply to him (to you SteveA).

Not quite the Spanish Inquisition but it comes from the same place, IMHO.

-Jim

Why not use a backtest to test a hypothesis? Isn’t that why we backtest? If you don’t believe in the ability to come up with a reason to choose one set of stocks over another then that’s why you buy index funds.

if I didn’t think I could come up with reasons (hypothesis) to outperform then I would stop wasting my time on this site. Every idea or theory is a hypothesis which can either be validated or invalidated. Some on small scales, some on grander much scales.

Jeff

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Jim,

You actually don’t have to pass any ideas through the forum. In fact I have several ideas I haven’t. This forum is not limiting you from testing whatever ideas you might like to try within the capabilities of the platform. However when you do voice an idea they can be up for debate. That is also a scientific principle. Anybody can come up with ideas in science, but they are subjected to the scrutiny of peer review. It is only after that scrutiny that ideas are more broadly accepted.

Jeff

This is my point too and I think I will stop with this agreement.

Thank you Jeff.

Thank you too SteveA. Whatever you call your methods they have been beneficial to me. Many of the quite modern, IMHO: like your evolutionary algorithm for rank performance optimization (in a spreadsheet).

-Jim

I think/hope nobody is disputing the idea of p123 as a place where one can come up with ideas (hypotheses for those who prefer that terminology) and ways to test.

The physics-envy topic calls for discussion re: the merits of different kinds of ideas and test protocols.

Many varieties can be addressed on p123 including those that try to shoehorn investment into an unrelated discipline. Those who cherish “physics envy” can certainly do/their thing on p123, ad many have over the years and undoubtedly, many will continue to do so in the future. But taking umbrage at suggestions that one could do better by letting investing be investing and stop trying to turn investment into physics, chemistry, medicine, aerospace, or whatever is untenable. If one wants to advocate for physics envy, that is one’s right. But nobody who advocates that, or ny other approach, has a right to expect to be free from opposition.

Marc,

I think the physics envy comes along because people desire accuracy and certainty of prediction that those discipline offer. None of which will ever exist in the financial/economics domain as long as human behavior is involved. Ill take what you say although I might be paraphrasing. It’s better to be somewhat right than perfectly wrong. I come to realize that more deeply the more I observe the markets. I do believe sound ideas can lead to positive outcomes or at the minimum prevent uniformed investment.

Jeff

Marc,

If you read the post where Physics Envy first arose you might notice that I strongly advocated for the validity of your ideas and for the value of studying finance. Without equivocation.

You suggested that I look up ‘Physics Envy’ which I did. I found one definition which I posted. From a fairly respected source that is certainly widely read.

You argue against the definition in the article I posted yourself:

You say you hope no one at P123 makes this argument but the authors at the NY Times do in fact make this argument. I disagree with them as you say you do.

I am sure there are other definitions we can both agree with but I did not see another clear definition in my short search. I suspect the term was originally used a joke but the authors decided to make a serious argument.

I don’t think I can be expected to edit the NY Times article by these authors to be a better article and then agree with it. The article as it is (and not how it should have been) I still disagree with.

-Jim

I am not putting forth a hypothesis and substantiating it via backtest. In fact if you check the backtest for the Aerospace & Defense DM you won’t find a super-model over the last 20 years. That is the difference here. And if the next president is a democrat then I will suggest reducing exposure to the DM. It is not a case of “real-time testing”, but using my past experience in engineering to capitalize on what I believe is a political phenomenon. As for Cloud Computing, this is just common sense. If investors don’t want to invest in trends, that is their choice. I backtested these DMs, not to “validate” them but to provide an optimal strategy. Whether the strategy is optimal going forward remains to be seen, but there is no validation of hypothesis here.

I’m going to cut to the chase here. In your (or my) lifetime, how many legitimate hypotheses do you truly expect to have? 100, 10, 5? I would like to suggest that you will be lucky if you have one really good hypothesis in your lifetime. And that is if you are lucky. It might be along the lines of DCF for example, and even then success depends a great deal on how it is applied. i.e. most people will never succeed with DCF, yet the MOAT ETF is having some success because the people behind it apear to understand the limitations, plus they have hundreds of analysts running the numbers.

So if you have maybe one truly great hypothesis in your lifetime, who is to say it is “this one” in front of you today. I can come up with 100 different hypotheses (trust me, I am a clever guy), and maybe 10 will outperform in backtesting. Does that legitimize the 10 hypotheses? Because that is what we are really talking about here. Everyone is performing optimization and most of us don’t realize it. But if it makes you feel good then go for it. But don’t believe for a second that your process (hypothesis->test) legitimizes it. Because in all likelihood you are optimizing and probably optimizing to an extreme, unless you are the one person in a billion that dreams up a hypothesis and it tests out brilliantly.

Right, sure. This brings me back to Chris Columbus. He validated his hypothesis.

Jim - I wish I could get into your head!. Its gotta be pretty interesting there.

I know what I am going to say will offend a few people, but there is little in the way of fundamental factors and hypotheses that don’t find their origins in empirical data. The observations generally come first, then the explanations come to support the observations. Not much different than Einstein or Sir Isaac Neuton. The big advantage that Einstein had was that he didn’t come up through the University environment and therefore wasn’t stifled by prevailing theories. Let us keep in mind that his theory of relativity was never recognized by the establishment.

SteveA

I guess you made it clear that you agree with the article.

I hope you do not mind if I continue to engage in a little hypothetico-deductivism.

Thank you.

-Jim

That reminded me of Gary Shilling. Since the '80s he has advocated being long the 30-year treasuries but always staying on the long end of the yield curve by rebalancing ever year. He claims to have done something like 5x better than the S&P500 over that time. That’s a once in a lifetime call and was based on the collapse of US interest rates. Google for more details since I haven’t checked his results in several years.

Walter

Steve,

I think you give me too much credit. I’m not sitting here coming up with new ideas per say just trying to implement different facets of already established economic and financial theories. We obviously know backtests don’t predict the future with certainty nor do we expect a backtest to carry forward indefinitely or at all. With that said, I’m not sure I care to debate this any further because it is becoming quite pedantic. So I’ll leave it be from here. In the end all I care about is making money anyway.

Jeff

Jim - as a healthcare professional, I’m sure you realize that pretty much every drug in existence is based on empirical testing and sometimes blind luck. (Penicillin comes to mind). How many substances are tested for carcinogenesis? How many substances are tested as a cure? How many researchers develop a hypothesis before they do any testing?

Correct me if I\m wrong, but only after an empirically-based observation is found does the researcher attempt to establish a causal relationship. Even then the researcher may not find or may not care to understand the exact mechanism. And how often is data (trials or analytical justification) biased by big business financials submitted to the FDA?

We are all surfing on the tide of financial information. We see the wave coming and stand up on the surfboard for a nice ride. Sometimes the sharks are out, sometimes we get thrown into the ocean, sometimes we get hit by a tsunami, but hopefully, the warning signal goes off in time. In the end, we hopefully get more out of the ride than it cost for the surfboard.

Take care
Steve