TI Complexity seminar Peter Bossaerts (The University of Melbourne)
'Asset Pricing under Computational Complexity'
We often think of investments as playing roulette, with “laws” that somehow can be discovered using statistics or machine learning. Yet many investment problems we face actually fall in a completely different category. Firm valuation, determining what to look for when predicting markets – even portfolio construction – are not statistical problems, but complex decision problems that require a very different, methodic approach. The best investors are those who follow disciplined approaches that resonate with the theory of computation. But what about markets? I show that markets should treat these problems as if they were statistical ones, and as a result, should underperform the average investor. Experiments confirm this prediction.