Principle of Duality of Nature in Investment Portfolio & Risk Management: Randomness & Causal Determinism.

 

That's the REAL test of Causality. I never use Backtesting ,  Factor based Regression Analysis, Simulations etc. for my investment and advocating such line of thoughts over the years  and don't even truly believe them as they are not scientifically reliable and there are fundamental issues with traditional tools followed by most !

Unfortunately, the majority of Industry are blindly using based on Superficial & Associational clams that exposing themselves to Black Swan Risks !!

First of all , unlike Classical Physics, Market is the Economic Space-Time system where Investors'(Modellers) knowledge of Causal Mechanism would affect the Causal Mechanism itself dynamically !! 

This issue of Self-Circular Reference is also one of the foundational concern lying at the foundation of mathematics itself, which makes it incomplete/ inconsistent !!

Even in the Causal Mechanism  Equations there would be Error terms( Random unspecified terms) . That's the beauty of Nature that Duality exists . Randomness & Determinism component  exist side by side and it's all relatively existing to the Observer based on the level of information.

These error terms could be quite significantly huge espcially in the Black Swan type events (e.g. 9/11 Terrorist event). That's also the source of Black Swan type events. 

So, the  strategy should be to follow causal confounder factors mechanism affecting the market  and simultaneously Strategizing the Randomness Component inherent in Nature. 

So, what I have been following  is actually the combination of Deterministic Causal Components and Strategizing the Error terms ( Random Unspecified sources) to build the Portfolio. 

The  Portfolio Construction , Allocation & Selection is built based on that Principle itself based on the Principles of Nature relying on Randomness + Causal Components. It would be very conducive to RCT testing ! 

Infact ,the principle  behind rhe Algo wheel is based on that Randomness principle.

Managing this Randomness is also suitable to Black Swan type risks that could come out of huge sudden error random Unspecified sources.

The method I have been following over the years to outperform the market rests on that Principle and Duality  of Nature scientifically. Infact , that would be very naturally  conducive to the principle of Randomized Control Trials !!