Trading Robots and Social Cues
Trading Robots and Social Cues
This chapter considers the challenges posed by economic models by introducing a statistical arbitrage trader named Todd and his use of financial algorithms. Todd's strategy also illustrates the novelty entailed in modern arbitrage, that is, the exploitation of mispricings across markets for securities whose value is ambiguously related. The chapter shows that there was a tension running through Todd's work. Whereas he sought to avoid psychological biases by relying on rigid decision rules, the uncertainty introduced by his algorithms often forced him to abandon his rules and rely on his judgment, as well as on social cues from the floor. Such tension is illustrative of a broader challenge posed by uncertainty in quantitative finance, which demands that traders develop precise numerical estimates and subsequently call them into question.
Keywords: economic models, financial algorithms, mispricings, psychological biases, social cues, quantitative finance
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