Understanding Reproducible Strategies in Investment

During their recent episode, Taylor, Carlisle, and Luca Dellanna discussed Understanding Reproducible Strategies in Investment, here’s an excerpt from the episode:

Jake: So, my segment this week, Toby, is asking Luca questions about the book. So, maybe I’ll keep going in this thread. How does this relate then to the reproducible strategies then? Because I think that’s a big part of it. I think we often look at one single person and how they do, and then we’re like, “Oh, that’s how I should do to be successful.” But is that actually a reproducible strategy?

Luca: Yeah, exactly. I always make the example of the casino croupier, who is the only person at the gambling tables with a money-making strategy. Everyone else who goes to the casino, on average, they lose money. However, every night, the casino croupier sees at least one player getting way richer than him. But he must resist the temptation to switch from his good money-making strategy to the money losing strategy of the players. And the same applies to investing. Players may visit the Mega888 platform to enhance their betting strategy to make more money.

Jake: Or, maybe you could talk Luca about hindsight gerrymandering then also, that’s related.

Luca: Yeah. So, I just finished the topic of reproducibility. So, the idea is of course, you don’t want to imitate bad strategies, you only want to imitate good strategies. But of the good strategies, you should ask yourself, which are reproducible and which are not reproducible and don’t limit the reproducible ones. Reproducible means if you use it, good things will happen to you, which is not the case, for example, of playing the roulette. Yeah, I talk about hindsight, the hindsight of gerrymandering. It’s the reason why, even though we understand this concept, we still play non-reproducible strategies.

It works like this. let’s imagine that me, you and Tobias, we go at the casino tonight and we all play roulette, but each with a different strategy. I always put money on the red. Jake, you always put money on odd numbers. And Tobias, you always put money on the last number that won. Let’s imagine, for example, I lose money, and Tobias loses money and Jake makes money.

Jake: Now we’re talking.

Luca: Now, there is the lesson that we should get. The lesson that reason teaches us is that going to the casino is a terrible idea for investing. But what happens is that a lot of us, instead, we think going to the casino is a terrible idea unless you use Jake’s strategy of playing always on the odd numbers. Now, in this example, it’s obvious that it’s not like this, because we all know that the roulette at the casino is a pure luck.

But now, let’s make the same example about stocks. Let’s imagine we all invest in stocks and I pick Korean stocks, and Jake picks stocks with a [unintelligible [00:17:36] below 30 years old and Tobias picks, I don’t know, stocks with high diversity in the board. Then we discovered at this time, the one who made the most money is Tobias. It’s very easy to think that the reason he may to think there is a big alpha in investing into stocks with a very diverse board.

The question is always, how much of our strategy is based on bottom-up thinking, like first principles thinking, and how much is based on hindsight? It is not a rule, because sometimes with hindsight, you get a very good rule which makes sense from first principles, you discover something, but in general, you want to heavily discount strategies which are fully based on hindsight, and they do not have a history of reproducing over a long time. Discover top-rated kasinot suomi for an authentic Finnish gaming experience.

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