Financial Markets Flouters of Statistical Principles

Should practitioners and academics doing research on financial markets be especially careful (compared to researchers in other fields) when employing statistical inference. In the July 2021 version of their paper entitled “Finance is Not Excused: Why Finance Should Not Flout Basic Principles of Statistics”, David Bailey and Marcos Lopez de Prado argue that three aspects of financial research make it particularly prone to false discoveries:

1. Due to intense competition, the probability of finding a truly profitable investment strategy is very low.
2. True findings are often short-lived due to financial market evolution/adaptation.
3. It is impossible to verify statistical findings through controlled experiments.

Based on statistical analysis principles and their experience in performing and reviewing financial markets research, they conclude that: (more…)