The Essence of Quant: 'Where Does Money Come From?' (#FirstPrinciplesThinking #Stoicism)

 

[Reposted] The pretty-but-hollow fruit called “vibe quant”: https://blog.naver.com/quantdaddy/224321144821

Reading that blog post hit me like a slap to the forehead.

Do I really have no choice but to abandon “quant” altogether?

The grand premise behind every quant strategy I’ve built so far was this:

Find the patterns that keep repeating.

Because I approached everything through the lens of statistics, I only ever came at quant through “quantification,” “data,” and “patterns.”

I kept piling my own conditions on top of the crowd’s alpha, and the more I piled on, the more upper and lower limits naturally kicked in — so of course the slice I could actually eat kept shrinking.

Chasing patterns this way, my experiments grew lopsided toward the past — toward the backtest.

There’s nothing wrong with that in itself.

 

But if I look at it through Elon Musk’s first-principles thinking (stripping a problem down as far as it will go until only the essence remains — the chain of “Why?” questions), it goes like this:

• It’s just too hard for a quant strategy to succeed in the age of AI => In the AI era, quant can churn out countless patterns in no time — keep doing that and you inevitably converge on the error of overfitting — that isn’t alpha. — So can I build a quant strategy that isn’t based on these past patterns? — Can I predict the future rather than the past? — I can’t predict the future. — For a quant to succeed means to make money. — Where does money come from? — It’s only made when someone else loses it. — Who is that someone? — Institutions? Retail? Whales? The big flows? — More likely the flow of institutions or whales than of retail. — How do you read the flow of institutions and whales? — When do institutions and whales lose money? — Is it only institutions and whales — or could it be retail too? Seems like it could. — In other words, it’s about eating the gap that opens up when a crack appears — finding the market inefficiencies that arise among the participants — finding a way to see the market as the whale rather than the prey — writing out scenarios for hunting as the whale — what does the whale look at (data, etc.)? — just feast on that gap in between, that niche market.

A scenario (example)

• Past-pattern thinking & ant’s-eye view: “Over the past 10 years, going long when RSI drops below 30 has a 60% win rate.” -> verify
• Inefficiency thinking & whale’s-eye view: “If long positions running excessive leverage right now get liquidated in a cascade, how can I ride the force of the resulting rebound buying and eat it?” -> study & verify & build

 

There’s so much to study..

Flip the grand premise and ideas start shooting up.. **( “charts,” “indicators” -> “humans” )

 

The essence: Where does money come from? (= market inefficiency)

ex) ideas