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Hot or Cold?
I love this quote from one of the greatest traders of our era because it goes against everything we’ve been taught the last couple decades, that streaks are random, that you can’t prove the hot hand, that you should avoid recency bias. For what is a streak but an acute case of recency bias? And we know from experience playing sports that streaks exist, that confidence is a thing and vice-versa.
So the idea you should sit a hitter who’s in a slump and play one that’s been hot the last few games is valid. Sensing what constitutes a streak or a slump and discovering the inflection points between the two is more art than science though, and for that reason, I can understand why some quants, who want to know the probabilities before making a decision, often avoid it.
But just because it’s not easily quantifiable doesn’t mean it’s not real. It reminds me of the parable of the drunk looking for his keys near the streetlamp and the bystander asking him why he’s only looking there, and the drunk replying, “Because that’s where the light is!”
Sometimes you have to look where the visibility isn’t so good too. If your eyes are capable of adjusting, you might find something others are overlooking.