How Big Is Almost? Or, Why the Finance Professiorate is Clueless About Manager Effectiveness

I found this paper via Niederhoffer's blog, Daily Speculations. Andrew Redleaf runs Whitebox - he is a smart guy. This has to be one of the coherent rejections of the efficient market theory ever written.

How Big Is Almost? Or, Why The Finance Professiorate Is Clueless About Manager Effectiveness


The professors missed the essential question. Their miss, however, was not a “mistake.” They missed it not because they did their research badly but because they did it well, not because they were sloppy but because they were scrupulous in their adherence to basic standards of scientific research. They were required by their own protocols to exclude the very force they were investigating, the power of human judgment.


And yet all this “cheating” is exactly what adroit money managers do not only in the narrow realms of technical analysis but in the general hunt for alpha as well. We assume that potentially profitable anomalies appear and disappear as market conditions change. We assume that such anomalies are almost certain to be more powerful and profitable for some sets of securities than for others. We look into the nooks and crannies of the market for trends that we can exploit profitably now, with some securities now. We hypothesize strategies that seem suited to current market conditions, test them, and then trade on promising results.


"Randomness or “incomplete knowledge” is a subjective phenomenon. Different observers will have more or less knowledge and more or less uncertainty as a result. Moreover we can gain knowledge by dint of hard work, natural talent, and sometimes luck. We can be well prepared or poorly prepared to make a decision, discover special relativity, or buy a security. Even our best efforts to increase our knowledge may be insufficient. We may know a lot but not quite enough. We may fool ourselves about our positive expectation. There is no guarantee that our search for knowledge will bring us close enough for success. But neither is there any basis for a dogmatic assumption of failure—or futility."