Peer Review

Steven Lord wrote a recent article for Modern Trader magazine about dormouse [sic]: a managed futures fund founded by Martin Coward et al. This paragraph really jumped out at me:

     > Eventually, the center will be staffed with scientists,
     > mathematicians, and programmers, with little emphasis
     > on finance per se and a significant emphasis on the
     > results-driven, peer-reviewed scientific approach to
     > the world. “Hedge fund managers don’t typically
     > operate in a peer-reviewed environment,” Coward says.
     > “But it’s what we live. It is much easier to strip
     > egos when each member of a group is subject to peer
     > review all the time. In science, merit wins, and it
     > is always anchored on data that is both provable and
     > repeatable. No one gets their nose out of joint if a
     > team member points out a flaw in a data set or suggests
     > a tweak to an assumption—it’s a necessary part of the
     > process. We sharpen our pencils and try again.
     > Everyone knows the approach ultimately results in a
     > stronger end product.”

Imagine me running out to the crest of the highest mountaintop and shouting this paragraph at the top of my lungs.

Peer review: everything that is missing in the world of finance.

I believe the academicians continue to participate in peer review on a regular basis but what filters to the surface and gets sold to the public in terms of investment/financial advisers and money managers absolutely does not.

Peer review is critical analysis: the most important logical tool applied for every post I have written falling in the optionScam.com category.

The subject of peer review with regard to finance first crossed my path when discussing Craig Israelsen’s article that I blogged about in August. He gave numbers without statistics. A financial adviser I spoke with, who seemed to have a solid academic background, mentioned that most writings in finance are not peer reviewed.

The lack of peer review is the reason salespeople, which most people recognize as “financial professionals,” get away with selling products like target date funds that may or may not be quality merchandise.

The lack of peer review (critical analysis) is what leaves the average Joe/Jane highly susceptible to fraud, which runs amok throughout the financial industry.

The most common question I ask when traders/investors start to sound arrogant is what data exists to support their claims?

First and foremost should be the financial engineers, statisticians, and the evidence to cut through the spin, the speculation, the advertising, and the marketing that leads people astray

Where Edge is to be had in this industry, I believe peer review would be the way to find it.