The False Strategy Theorem: A Financial Application of Experimental Mathematics

American Mathematical Monthly, forthcoming

7 Pages Posted: 3 Aug 2018 Last revised: 23 Aug 2018

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; Abu Dhabi Investment Authority; True Positive Technologies

David H. Bailey

Lawrence Berkeley National Laboratory; University of California, Davis

Date Written: July 29, 2018

Abstract

The False Strategy theorem tells us that the optimal outcome of an unknown number of historical simulations is right-unbounded — with enough trials, there is no Sharpe ratio sufficiently enough to reject the hypothesis that a strategy is false. Given the ease with which one can use a computer to explore many trials or variations of given strategy and only select the optimal variation, it follows that it is very easy to find impressive-looking strategy variations that are nothing more than false positives. This is the essence of selection bias under multiple testing.

Keywords: Selection bias, multiple testing, False Strategy theorem, experimental mathematics

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

López de Prado, Marcos and López de Prado, Marcos and Bailey, David H., The False Strategy Theorem: A Financial Application of Experimental Mathematics (July 29, 2018). American Mathematical Monthly, forthcoming, Available at SSRN: https://ssrn.com/abstract=3221798

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

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HOME PAGE: http://www.orie.cornell.edu

Abu Dhabi Investment Authority ( email )

211 Corniche Road
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United Arab Emirates

HOME PAGE: http://www.adia.ae

True Positive Technologies ( email )

NY
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HOME PAGE: http://www.truepositive.com

David H. Bailey

Lawrence Berkeley National Laboratory ( email )

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HOME PAGE: http://www.davidhbailey.com

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
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HOME PAGE: http://www.davidhbailey.com

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