Welcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Alpha, published by Erich Grunewald on July 1, 2023 on LessWrong.

Summary

In the first half of this essay, I recount two anecdotes. (The impatient reader can skip these.) First, Gerald Murnane tries, around Melbourne in the 1950s, to find a system that'll make him money betting on horse races. Then, Bill Benter, in Hong Kong in the 1990s, comes up with a system for picking horses that makes him nearly $1B.

In the second half of this essay, I discuss alpha:

In finance, alpha is (a) excess returns earned on an investment above the market when adjusted for risk, (b) an investor's ability to beat the market, or (sometimes) (c) a strategy or resource that consistently generates excess returns. Outside finance, alpha refers simply to someone's ability to beat their competitors, the edge they have over their rivals.

Often what appears to be alpha is just noise. There are domains, like stock exchanges, where alpha is scarce, and other domains where it is abundant. Generally, the more valuable the object, the more crowded the field, and the harder it is to find alpha.

Six very tentative ways of finding alpha are (1) seeking decision-relevant yet generally inaccessible knowledge, (2) making deep analyses, (3) extrapolating stable-seeming, high-entropy trends or lines of reasoning, (4) finding systematic ways that others act suboptimally, (5) seeking out places where one has relatively greater ability than everyone else and/or (6) making bets that few others can afford to make.

Form-Plan

In the long-ago 1960s, I knew a man who claimed to have been helped through a troubled period by his faith in psychoanalysis. When I myself was going through such a period, he urged me to read a certain huge book on the subject. I've forgotten the title but I recall the author's name, which was in gilt letters on the dark-green spine: Otto Fenichel. I read several chapters but I recall today only two short passages. One passage described the symptoms of a man with obsessive-compulsive disorder. He could never walk more than a few paces forward without obeying an urge to look behind him for any beetle that was lying helpless on its back and needing to be set upright. The other passage was the opening sentence of a section on gambling. According to the learned author, the gambler gambles in order to learn whether or not God has forgiven him for his masturbation.

Those are the opening sentences of the chapter, not on insect welfare, but on betting systems in Gerald Murnane's fairly Australian autobiography Something for the Pain (Murnane 2015, 89--100). Murnane goes on to write that, had the psychoanalysts "ever learned how much time and effort I've put into my search for a reliable and profitable betting system, they could only have concluded that I was either the all-time champion Onanist or, at least, the one of all the practitioners of the ancient art who felt the most guilty about it".

Most punters probably have more in common with the beetle sympathiser than with the uneasy sinner: they're driven more by compulsion than scrupulosity. And yes, Murnane's motivation was (he reports), in his later years, simply the pleasure of discovery, and in his early years, more akin to that of the FIRE crowd -- to be able to "rent a comfortable flat in Dandenong Road, Armadale; to own a small car; to join a middle-level golf club; and to put together a library of a few hundred volumes of fiction and poetry, along with a select collection of long-playing records".

During those early years -- this was in the late 1950s -- Murnane began to notice advertisements for a betting system called Form-Plan. Murnane had begun his life-long pursuit of profitable racing systems in 1952 when, at the age of 13, he began to search the Sporting Globe for patterns in the past form of winners; these efforts naturally worked pe...