Inside the Black Box: The Simple Truth About Quantitative Trading

9.1. BLUEPRINT FOR RESEARCH: THE SCIENTIFIC METHOD

A characteristic shared among well-behaved quants is their adherence to the scientific method in conducting research, which is of course the way science is done in every other field of study. This is critical because it forces rigor and discipline into the single most judgment-driven portion of the entire quant trading process. Without such rigor, quants could easily be led astray by wishful thinking and emotion rather than the logic and consistency that make scientists useful to the world in so many other disciplines.

The scientific method begins with the scientist observing something in the world that might be explainable. Put differently, the scientist sees a pattern in her observations. For example, in most circumstances, if something is above the ground and is left unsupported, it falls towards the ground. Second, the scientist forms a theory to explain the observations. Sticking with the same theme in our examples, the scientist can theorize that there is something inherent in all things that cause them to move toward each other. This is better known as the theory of gravity. Third, the scientist must deduce consequences of the theory. If gravity exists, the orbits of planets should be predictable using the consequences of the theory of gravity. Fourth comes the all-important testing of the theory. But rather than looking to "prove" a theory, properly done science seeks to find the opposite of the consequences deduced, which ...