Allegory of the replication crisis in algorithmic trading

One of the most interesting ongoing problems in metascience right now is the replication crisis. This a methodological crisis around the difficulty of reproducing or replicating past studies. If we cannot repeat or recreate the results of a previous study then it casts doubt on if those ‘results’ were real or just artefacts of flawed methodology, bad statistics, or publication bias. If we view science as a collection of facts or empirical truths than this can shake the foundations of science.

The replication crisis is most often associated with psychology — a field that seems to be having the most active and self-reflective engagement with the replication crisis — but also extends to fields like general medicine (Ioannidis, 2005a,b; 2016), oncology (Begley & Ellis, 2012), marketing (Hunter, 2001), economics (Camerer et al., 2016), and even hydrology (Stagge et al., 2019).

When I last wrote about the replication crisis back in 2013, I asked what science can learn from the humanities: specifically, what we can learn from memorable characters and fanfiction. From this perspective, a lack of replication was not the disease but the symptom of the deeper malady of poor theoretical foundations. When theories, models, and experiments are individual isolated silos, there is no inherent drive to replicate because the knowledge is not directly cumulative. Instead of forcing replication, we should aim to unify theories, make them more precise and cumulative and thus create a setting where there is an inherent drive to replicate.

More importantly, in a field with well-developed theory and large deductive components, a study can advance the field even if its observed outcome turns out to be incorrect. With a cumulative theory, it is more likely that we will develop new techniques or motivate new challenges or extensions to theory independent of the details of the empirical results. In a field where theory and experiment go hand-in-hand, a single paper can advance both our empirical grounding and our theoretical techniques.

I am certainly not the only one to suggest that a lack of unifying, common, and cumulative theory as the cause for the replication crisis. But how do we act on this?

Can we just start mathematical modelling? In the case of the replicator crisis in cancer research, will mathematical oncology help?

Not necessarily. But I’ll come back to this at the end. First, a story.

Let us look at a case study: algorithmic trading in quantitative finance. This is a field that is heavy in math and light on controlled experiments. In some ways, its methodology is the opposite of the dominant methodology of psychology or cancer research. It is all about doing math and writing code to predict the markets.

Yesterday on /r/algotrading, /u/chiefkul reported on his effort to reproduce 130+ papers about “predicting the stock market”. He coded them from scratch and found that “every single paper was either p-hacked, overfit [or] subsample[d] …OR… had a smidge of Alpha [that disappears with transaction costs]”.

There’s a replication crisis for you. Even the most pessimistic readings of the literature in psychology or medicine produce significantly higher levels of successful replication. So let’s dig in a bit.

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