Sidewalks and Trading

Mike Munger, an economist at Duke University, offers this thought experiment.

Let's say you're designing and building a university.

You've created the plans for all the beautiful, prestigious-looking buildings.

You know where the grassy quads are going to go.

You've got plans for the dormitories.

It's going to be awesome.

One of the last things you might consider is: where are the sidewalks going to go?

You could consult some engineers to figure out where they should go.

You could create a committee of professors and students to have a bunch of meetings to come up with a plan.

But Munger suggests there's a much easier and simpler way to decide.

Go ahead and build the university buildings and plant grass in all the quads between the buildings.

And build no sidewalks initially.

Then open the university and wait two years.

At that point, build sidewalks where all the brown paths in the grass have formed from people walking.

I love this thought experiment because the solution is so simple, while most of our instincts are to over-engineer a "perfect" solution before breaking any ground at all.

Many technically minded traders do the same thing with their trading strategies and backtests.

How are you over-engineering your backtest, trying to make it perfect before putting any money at risk?

Here's the thing:

There's always something you COULD do to make your backtest "better."

But oftentimes you're better off waiting and making those decisions based on real, live market action.

Think of going live not as the end game, but as an opportunity for the smartest traders in the world to give you feedback on your strategy in real time.

-Dave

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