Can Investing Research Be Made Scientific?
February 2, 2023 - Big Ideas, Investing Expertise
Should investors presume that, in the absence of falsifiable theories, the body of factor investing research is largely spurious? In the January 2023 version of his paper entitled “Causal Factor Investing: Can Factor Investing Become Scientific?”, Marcos Lopez de Prado reviews the current state of confusion about causality in factor investing research and discusses ways to resolve that confusion. Specifically, he addresses:
- Differences between association and causation.
- Why the study of association alone does not create scientific knowledge.
- How observational studies, natural experiments and simulated interventions support investigation of causality.
- The current state of causal confusion in econometrics and factor investing studies.
- How to transform factor investing into a truly scientific discipline.
Based on many references and the logic of the scientific method, he concludes that: