It’s too much to expect the people who run big Wall Street firms to speak in plain English since so much of their livelihood depends on people believing that what they do cannot be translated into plain English. - Michael Lewis The Big Short
Quantitative analysis has generated major improvements in our ability to trade and make better investment decisions, but quantitative work that cannot be easily explained is detrimental to good investing and can lead to greater market failure. Models will fail, but for investors there is a second level of failure from surprise. The model you thought would work doesn't at critical times.
All quantitative analysis (in fact all investment work) should explain in plain English:
- How it will potentially add to return or reduce risk
- How it works at a level that can be understood by an average investor not just CFAs, MBAs, or PhDs. To say it is understood means that the average investor can explain it to another investor and field questions.
- Why it is needed - the investment problem that need to be solved, what is being counted or measured in the case of a quant model, and why a level of complexity or specific technique is needed over a simpler approach.
- When it will work and when it will not; no surprises for a model breakdown.
Einstein said, "if you can't explain it to a size year old, you don't understand it yourself." That may be an extreme, but it should apply to any model or investment idea. Cheers to plain English.
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