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Inverse correlation between school education and trading?
I come from the same educational and job demographic as you.
My explanation is that your sample size is too small to validate the hypothesis. There are several advantages to an education. For example, you'll be more likely to be willing to learn how to program than have to pay someone else to do it for you. It's very hard for me to think of reason why it's bad except for the opportunity cost in time and money, but I do know of one: One of the common ways education can work against you is that it accustoms you to rules and facts set in stone. If you don't know something for an upcoming exam, your professor has the answer.
This turns out to be one of the worst habits for trading.
I have a friend who puts it this way: There's a measure for dynamical systems called the Lyapunov exponent, which sets an upper bound for how far you can look into the future in a chaotic system. The Lyapunov exponent for finance, he believes, is 1 year. You can't predict ahead of that.
A corollary of this is that none of the existing trading texts would have complete look-forward relevance. Not one trading strategy - not that I know of - even the most autonomous and automated ones, are switch-on-and-forget. (I'll stray off-topic a little: One of the interesting things, is that people can learn nuances from experience, which attributes to their manual trading success. Taking the same paradigm and bringing it to automated trading is a dangerous idea, because the way that we learn is very different from a simple optimization routine, parameter sweep and recalibration.) That's why everyone who comes in an investment bank is put through training (there is an entire division dedicated to training) before he or she becomes responsible for actual capital, because there is nothing in college that teaches (or could teach) you on how to trade, besides the ability to learn per se. (Of course, I'm neglecting that some basics of programming, probability functions, statistical distributions and options pricing and payoff would make a good headstart.)
There are several firms that only recruit from the academic powerhouses, and have ridiculous success to show for it. The top players in HFT come to mind: Getco, Renaissance Technologies and Jane Street.
Rentech recruits mostly PhDs only, and they're the most consistently successful hedge fund in history. To add to @Fat Tails's list, James Simon would credit all of his trading expertise to education. The first papers that he published very shortly after retirement give a glimpse of the type of trading strategies that he used (See: arXiv.org Search), probably of the manifold learning variety.
Jane Street Capital has a few rounds of interviews testing mostly academic material (probability puzzles of this variety: Amazon.com: Fifty Challenging Problems in Probability with Solutions (Dover Books on Mathematics) (9780486653556): Frederick Mosteller: Books but also the standard questions, e.g. "derive Black-Scholes") and typically only hires from the Ivies. I know that they have several Putnam Competition and MCM honors divided across its floor. The firm only accepts investment from its employees. I've attached their 2011 annual audit, which suggests that they have generated 585m of capital with only 120 employees.
Getco follows a similar model of hiring, except that they are involved in the fastest execution on the market right now. (Now that their rival, KCG, got destroyed.) To put it in perspective, while Jane Street may be holding anywhere from 3-5b of overnight positions at one point, Getco would be holding as little as 500k, and they are hardly leveraged. Their office is surrounded with whiteboards sprawled with equations. Which makes sense, because it turns out that it takes some game theory to get FPGAs to battle one another.
DE Shaw, Jump, Optiver, DRW, SIG, all practise the means of hiring - pick the brightest from the Ivies - and the fact that they are on top of the buy-side right now suggest that education can in fact be positively correlated to trading performance if you know how to make use of it.
Finally, you're right - there's a lot of difference between trading in an investment bank (sell-side) or with a proprietary trading firm, hedge fund, or on your own (buy-side). Sell-side trading is mostly market-neutral, because there is a lot of commission to be made from helping someone fill the positions on a $5b portfolio, whether or not that portfolio generates profit. And algorithmic trading at an IB is less about backtesting than it is about a nonlinear optimization of the trade-off between optimal execution path and liquidation time with urgency of seeking liquidity (do you tap, float or hide?) and visibility of order on the market.
I think there's a lot to learn on both sides of the Wall. One of the good things about trading on the sell-side is that when a strategy stops working, you're able to quickly grasp the macroeconomic factors leading to its demise, and learn to stop blaming the Big Swinging Dicks (Getco, Rentech and Jane Street come to mind again) for everything. Even navigating red-tape is an eye-opener. You could have a strategy that involves the stock of an insurance company in the same office building, and nope, you're not allowed to trade their stock, even if you're missing on tons of alpha. You could spend the whole night working out on how to capture a volatility skew on an option chain, then get slapped by your boss for another regulatory reason. This sort of frustration can help develop your trading skills really fast.
This is a good observation. The unusual thing which I don't understand is that in an investment bank, the higher your PnL, the faster they promote you to a managerial position that is distanced away from the actual trading.
"The trader afraid of losses is like a surgeon who faints at the first sign of blood."
You're exactly right Mike. Van Tharp wrote extensively on our conditioning and our requirement to be "correct" most of the time. Even from the time we're in grade school, we're taught that 90% or above is excellence and achievement and anything less than 70% is failing or poor. He outlines how in many instances in trading, the best solution may call for a trader to be correct less than 50% of the time, which is uncomfortable to many people. He discusses how the need to be "correct" causes many traders to seek strategies and approaches that feature high win%, and that many times, those types of approaches necessitate small wins and large losses. Without a thorough understanding of risk, drawdown expectancy and tolerance, many traders feel "confirmed" or "reinforced" when they are correct and possibly to their own detriment in the long run.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
No, take college or university courses. Something that you like or you think will help you with your trading (economics, psychology, math probability, etc.); And, use it as an escape from pitfalls of trading -- this is what I’m doing with my day job until I’ll let go my ego. With ego out of the way, I think I will be able to handle anything!
D
One could still go to college or highschool, and play this "chartgame" for like 5-10 minutes everyday. Like some people who are non-3d or console gamers are hooked on and still play Windows 9X/7/8 Solitaire everyday out of habit. Probably eventually improve on a feel for market price action after a month or a few weeks at least.
I would definitely say no to an inverse correlation. Before I went off to college, even before I graduated high school, I was trading (obviously paper when I was younger). My trading skill has improved since I arrived at college but I do not attribute it to college solely. I relate trading to more of a sport or a game than anything based on education. Being good at trading is not something that can be taught nor does college attempt to teach it in any way. Practicing trading, like any sport or game, is the only thing that will make one better. The advantage of mental discipline will overcome brute force in nearly every situation. Being a math major I have learned things that I can apply to trading but even with that knowledge I can make bad trades if it weren't for experience.
I am a little surprised at the general anti-intellectual mindset some independent traders have considering your point above, and the fact that the world around us has conveniences and technology implemented by educated people. I would think if a college education is something they don't have, and they still make money, then why exactly does it matter?
I haven't met many people with advanced degrees that are "Dumb as bricks" if its in a STEM field. A lot just lack experience, myself included. You don't typically learn business or management sense as an engineer for example until you hit the workplace. A lot of engineers in senior positions go back for their MBA to help remedy that, but they aren't given positions just because they have an MBA, they are given them because of experience. The majority of the things you learn to do for your job is on the job, but education can help you think of ways to do things at your job others may not think of.
Here's a prime example of experience winning in some cases from my life. My father is an extremely good poker player, and has won quite a few tournaments. He has a basic high school education. He "feels" what the odds are for particular hands because he has had so much experience playing the game. There is obviously the psychology of the game as well, but without a grasp of the odds you are only going to win half the battle. I could calculate these odds, and he could probably be taught to, but an education wasn't needed for him to become good at the game.
In fact I remember that I learned to speak by listening to other people speaking. Only later in life I was taught Latin grammar. Although this was beneficial for my overall education, I never learnt to speak Latin....
I don't buy the inverse correlation. But maybe something is not right in a society where the penultimate goal of applied mathematics is to siphon money out of the capital markets. Sorry, just a thought... I apologize in advance. Slap... anticipating the sting of opprobrium!
regards,
Zondor
(BSME)
(PhD, Honorary in Men's Neckwear Design and Zombie Eye Transplantation)
"If we don't loosen up some money, this sucker is going down." -GW Bush, 2008
“Lack of proof that something is true does not prove that it is not true - when you want to believe.” -Humpty Dumpty, 2014
“The greatest shortcoming of the human race is our inability to understand the exponential function.” Prof. Albert Bartlett
