Harking Back: Lessons In Investing From Science

Confirm Ye Not

Here’s what ought to be a really boring idea – we need scientists in general and psychologists and economists in particular to stop hypothesising after results are known (HARKing, geddit?). Instead they need to state what they’re looking for before they conduct their experiments because otherwise they cherrypick the results they find to confirm hypotheses they never previously had.

The underlying problem is our old foe, confirmation bias. And the solution for scientists and social scientists alike is known as pre-registration. It would be no bad thing for investors to demand a similar process for fund managers and financial experts. Or, for that matter, to apply some of the ideas to their own investing strategies.

No No Negatives

It’s been known for years that a lot of scientific research isn’t very reliable. There are numerous problems, chief amongst them being the non-publication of negative results: an issue known as publication bias. There’s no kudos in showing that your hypotheses were wrong, so researchers and corporations tend to bury the data, but it’s still valuable information that should be shared: scientists see further by standing on the shoulders of others, we shouldn’t be encouraging them to shrug them off because they’ve got bored.

Worse still, though, is the fact that many studies turn out not to be replicable. The ability to re-run an experiment and produce the same result is an absolute cornerstone of the scientific method: science works because it’s not built on faith, it’s constructed out of evidence. If it turns out that the evidence is unreliable then what’s being done isn’t science, it’s more like religious studies with instruments. 

Or economics.

Repeat, Again

Once we move to the social sciences then the problems are even worse. Human beings are terrible things to experiment on, being inclined to change their minds, develop opinions about the experiments and to second-guess what the researchers would like them to do, just to be nice.