The “Master of the Robots” on machine learning in finance

Marcos Lopez de Prado

The Master of the Robots

Marcos Lopez de Prado, who was named Quant of the Year for 2019 by the Journal of Portfolio Management, is widely regarded as one of the leading quantitative mathematicians in today’s financial world. He currently ranks #1 among authors in the economics field on the SSRN research network, as measured by downloaded articles within the past 12 months.

In a Bloomberg article titled The Master of Robots Left AQR. Now He’s Coming for Wall Street, Lopez de Prado explains why he established his own company (True Positive Technologies) to dispense

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Will investors outlive their savings?

Worldwide life expectancy at birth by region, 1950-2050

Target date funds and formulas for retirement

As we explained in an earlier Mathematical Investor blog, “target-date funds” are currently the rage in the finance world. The term refers to a mutual fund that targets a given retirement date, and then steadily shifts the allocation of assets from, say, a 80%/20% mix of stocks and bonds at the start to, say, a 30%/70% or 20%/80% mix as the target date approaches.

Vanguard Group, which manages over USD$5 trillion in assets, much of it in employer-offered defined contribution retirement plans, reports that

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Go with big data and machine learning, or leave finance to those who do

Mailiao Refinery, Taiwan Courtesy Planet Labs and Quandl

Big data: big buzz

“Big data” encompasses the collection, processing, indexing and analysis of large-scale datasets. Some concrete examples in the scientific computing arena include temperature and sunlight data from satellites monitoring of the Earth’s environment, particle tracking data produced by the Large Hadron Collider in Europe, satellite image data used in the search for planets orbiting distant stars, and studies of the cosmic microwave background radiation.

These same big data collection and analysis techniques are now being applied to arenas that are decidedly more down-to-earth. These include anonymized smartphone

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Interview with Marcos Lopez de Prado

Marcos Lopez de Prado

Marcos Lopez de Prado, who was named “Quant of the Year” for 2019 by the Journal of Portfolio Management, and who has recently formed his own investment firm True Positive Technologies, was recently interviewed by KNect365, an organization that sponsors numerous conferences and other exchanges between professionals in various fields, including finance, life sciences, technology, law, agriculture and energy.

In his interview, Lopez de Prado distinguishes between math-quant firms and econ-quant firms. The former are led by empiricists, often with backgrounds in mathematics, computer science, physics and engineering, and apply a wide range of cutting-edge

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Protein folding via machine learning may spawn medical advances

Complex of bacteria-infecting viral proteins modeled in CASP 13

Introduction

In an advance that may presage a dramatic new era of pharmaceuticals and medicine, DeepMind (a subsidiary of Alphabet, Google’s parent company) recently applied their machine learning software to the challenging problem of protein folding, with remarkable success. In the wake of this success, DeepMind and other private companies are racing to further extend these capabilities and apply them to real-world biology and medicine.

The protein folding problem

Protein folding is the name for the physical process in which a protein chain, defined by a linear sequence of amino

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Frank Fabozzi blasts the state of academic economics and finance

An academic “ivory tower” (St. John’s College, Cambridge, UK)

In an interview published at the Enterprising Investor blog, Frank Fabozzi, a well-known researcher and author in the mathematical finance field, has sharply criticized the current state of academic economics and finance.

Here are some highlights:

The “rational models” constructed in economics and finance are increasingly disconnected from real-world behavior, as has been shown by research in behavioral finance. As Fabozzi and Sergio Focardi argued in 2012, “economics in its current form does not describe empirical reality but an idealized rational economic world.”

The problem with relying on “rational

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Technical analysis in major brokerages and financial media

Weather prediction, medical diagnosis and technical analysis

Suppose, in the weather forecast part of a local newscast, the person handling the weather displays a chart of recent temperatures in the local area, points out “trends” and “waves,” then mentions a “breakout pattern” from a recent temperature range. Most of us would not have much confidence in such a dubious and unorthodox forecast, and, if followed (e.g., for a major storm), could have serious consequences.

Or suppose, when one’s electrocardiogram is taken at a clinic, that the attending physician makes some measurements by hand between some events on the graph

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P-hacking and backtest overfitting

Credit: Wikimedia

The reproducibility crisis in science

Recent public reports have underscored a crisis of reproducibility in numerous fields of science. Here are just a few of recent cases that have attracted widespread publicity:

In 2012, Amgen researchers reported that they were able to reproduce fewer than 10 of 53 cancer studies. In 2013, in the wake of numerous recent instances of highly touted pharmaceutical products failing or disappointing when fielded, researchers in the field began promoting the All Trials movement, which would require participating firms and researchers to post the results of all trials, successful or not. In

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The seven reasons most econometric investments fail

Marcos Lopez de Prado, recently named 2019 Quant of the Year by the Journal of Portfolio Management, has released a presentation entitled The seven reasons most econometric investments fail.

Lopez de Prado’s overall point is that many widely used econometric approaches in finance either rely on misleading p-value statistics, or else rely on strong assumptions that are typically not satisfied by financial phenomena. Also, most econometric methods in finance do not pay sufficient attention to overfitting, either in the training set or in the testing set. These tools were, for the most part, developed in scientific fields such as

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Ray Dalio on why capitalism must be reformed

Credit: Ray Dalio

Dalio’s chronicle of capitalism’s ills

Ray Dalio, the founder of the highly successful hedge fund Bridgewater Associates, has written a detailed paper on why present-day capitalism, especially as it exists in the U.S., is in serious trouble and must be reformed, or else society risks increasingly serious social discord and economic dysfunction.

Dalio’s essay contains a treasure-trove of data, statistics and charts documenting the difficulties U.S. society in particular faces in the wake of increasing economic inequality, especially the manifold stresses faced by the less-well-off, and likely outcomes if nothing is done.

Here are some of

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