On May 16th, Terrance Odean and Steve Ross debated behavioral versus neoclassical finance at the New York Academy of Sciences.

Both agreed that markets are largely efficient. Ross described the "migration of anomalies" where "sharks" capitalize on and thus mitigate inefficiencies. But procedurally, Odean echoes Larry Harris in asking "who is on the other side of your alpha" and focuses on the psychological mistakes individual investors make (overtrading, selling winners/holding losers etc.). As an economist, Ross has difficulty ascribing pricing to one particular psychological malady or another and instead urges investors to follow the money and discern the incentive structure. Rick Bookstaber, who moderated the discussion, was optimistic that a biological model that incorporated feedback might provide additional explanatory power. In all, it was an interesting discussion about the nature of the elusive edge.

I strive to document the rationale for including explanatory variables and while some studies incorporate a behavioral (recency), economic (cobweb) or domain (market structure or environment) framework, most of my studies rely on theory-less statistical modeling which the private equity crowd refers to as "correlations". Is there a theory to explain why data driven investing might succeed?


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