Wednesday, April 1, 2015

The Paradox of Skill


With all the amazing changes and “advancements” in finance over the last thirty years, you would think they had figured out how to beat the market. In fact, it is getting harder and harder to beat the market. We call this the “paradox of skill.” 

As more and more technology and more and more expertise is applied to beating the market, this increase in skill paradoxically makes it more and more difficult to beat the market. 

Just as athletes today are bigger and stronger compared to athletes of yesteryear, so to investment managers of today are smarter and quicker than ever before. However, unlike improvements in athletic performance, there are no discernible improvements in alpha (beating the market) by market participants. And not only that, but it requires an incredibly long performance history to gather sufficient data to make any statistical inferences as to whether outperformance was a result of skill vs luck. 

Good luck with that. 


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