I ate a little too much on Christmas eve and couldn't sleep, so I thought I would read my fresh copy of the Heretics of Finance while I waited for the fat man to make his entrance through our chimney. By 2:00 AM no Fatman, no gifts and a disappointing book was finished.
Andrew Lo faces a challenge with any book he writes or co-authors. That challenge is the quality of the body of work he has produced before. He is one of my favorite academics in quant finance as he usually has a healthy skepticism of the efficient market hypothesis and is willing to entertain differing opinions and properly treat the EMH hypothesis correctly as hypothetical. This is good science and good judgment, he is robust quantitatively and uses good tools and judgement.
The book Heretics of finance is a series of questions posed to some of the ancien regime of technicians. I anticipated an intriguing insight into robust results of various technical approaches. What was delivered was a series of interviews rife with confirmation bias, subjective review and sorely misplaced self congratulatory praise for "beating" the academics.
The practitioners barely seem to articulate what they do or how they do it, much less present a convincing case "it" has been done. The title Voo-doo market technician may stand tall after reading this book, if it is held up as the heretics defense.
Most technicians use variations on the theme of a filter (low or high) pass from a signals perspective and seek to transform a price signal into a secondary signal with lower variance and a mean that is shifted to the right with lower kurtosis than the original signal.
Moving averages, RSI etc. and the usual cast of characters make their appearance here. I have a lot of patience for the tools they use if they provide results, but little sympathies with the depth with which these practitioners seek to understand either how the tools work or why.
Studying ancient Greek oracles reading chicken entrails teaches one a bit about Greek culture and the standing of the priestly caste, but woefully little about the drivers of history or fortune telling's ability. The Heretics of finance, serves up the priests, hands covered in entrails, but with little else to speak of other than a knowing pride that technicians aren't academics.
Andrew Lo has written some good things on quant approaches such his work on statistical arbitrage failure and the dispersion failures in august 2007. This book is disappointing as it neither entertains nor illuminates. I should have picked a classic for Christmas eve as I scored an own goal with this one and got a big lump of coal for the effort.
P.S. I'm not anti-technician. I created a quant forex index based on a series of filters seperated by E to reduce harmonics years ago. The approach works, becuase of serial correlation in central bank rate moves. No magic just extracting serial auto-correlation using a series of filters. The document is here. If you are interested in quant approaches or have a qaunt fund looking to work with someone. Lets talk. I'm up double digits for 2008 with a 1.10 sharpe ratio using L/S equities.