Follow the ants to richness

10 comments
A friend of mine told me the secret of making money at the stock market. "It's easy", he said.

All I would have to do is to buy a big jar of ants. Then I should observe the ants movement on my kitchen table, while following the stock market.

I shall keep the ants which walk in line with the stock market and remove those who don't. Eventually I would have one ant left that walked all the way in line with the stock market.

Bingo! This is the one I have to keep feeding well and observe, as it clearly can predict the movements of the stock market.

For more complex problems I recommend to use animals with bigger brains.




10 comments :

  1. Holger K. von Jouanne-Diedrich29 January 2013 at 09:51

    This is the best illustration of data-snooping bias and overfitting I have seen so far: Perfect fit in-sample yet total failure out-of-sample!

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  2. I think it's nearly 1 Feb., not 1 April

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  3. have ants; will sell.

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  4. your code is cheating though: your super-ant is identically the movement of the market, instead of the 'best' ant of 100. *I want to know how big 100 has to be!* I don't have room for 10^8 ants in my kitchen.

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  5. also, if one uses your code to see how bad the 'super ant' is out of sample, they would come to the entirely wrong conclusion!

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  6. All you did is just MA(1), and it doesn't represent the markets since it is not Random walk.

    Your friend did not provide you with a good model, market has auto regressive and GARCH is more appropriate for the market volatility...

    Regards

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  7. make me re-think about modelling. Thanks.

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  8. haha, I think you're all missing the point however.

    While it's great to be able to identify Mr Super Ant, what we really want to know is - where will he walk next? and, am I really happy living with this many ants in my kitchen?

    Here's here the forecast package can help. It has an algorithm that will auto fit a timeseries forecast model. type the following after the script above:

    install.packages("forecast")

    library(forecast)

    plot(forecast(stocks,level=c(0.25,0.5,0.75),h=10),main="Super Ant Marches Forth!!")

    hence we see where he'll walk in the next ten days about 50% of the time (i.e. IQR in the dark blue band).

    this also allows us to dispose of Super Ant himself and rid our kitchen of pests...

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  9. Thanks David,
    One line of R code and I know the future!

    Absolutely brilliant.
    Cheers
    Markus

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