Bayesian Filters are everywhere in Quant Trading. The most ubiquitous is the Kalman Filter. Trading without a filter is like bringing a knife (or spoon?) to a gun fight.
Humans behave a lot like collections of filters. We constantly make expectations, then revise our expectations and take actions as a result of new information. We can think of our expectations as an collection of internal beliefs.
This process defines the "main loop" of the Bayesian Filter. Without descending into impenetrable formulas, we can think of a filter as a looped process that has expectations about a signal it is observing. This signal can be any stream of information. When a new update from the stream becomes available, the filter compares the signal against its expectations and adjusts its internal state based on how far off it was with the previous expectation. Then it waits for new info and repeats the process all over again.
One of the concepts that characterizes this process is often called the signal to noise ratio. While this concept can be explicitly defined in many ways, intuitively the concept remains the same across filters and humans:
The Signal-to-Noise Ratio (SNR) defines our relative preference for new versus old information. If the signal to noise is low, we are skeptical about what we observe and tend to place more weight on our own internal beliefs, even in the face of contradictory evidence. On the other hand, if the signal to noise is high we respond to new information as the truth and revise our internal beliefs to quickly match what we observe.
Of course, in practice the SNR can take values along a continuum. To make the analogy complete, I think its appropriate to think of humans as a collection of SNR's which apply to different contexts, or "channels". For example, an individual's SNR is very low in channels like politics or religion. In that case, no matter what information that individual encounters they are likely to continue thinking whatever they believed before.
On the opposite end of the spectrum, we might call someone with a high SNR as highly suggestible. At dinner time my SNR on the food channel is very high: any suggestion (e.g. a tasty burger) is likely to align my internal state in that direction. My SNR on the political channel might remain low whilst my ratio on the food or "what-to-do" channel is high, especially if its the weekend.
I think this abstraction has value in a number of commercial pursuits. Something similar is probably already in use. My immediate thoughts turn to its utility for marketers, but I believe the concept has a multitude of uses for personal study (i.e. applicable to trading). Advertisements should be more valuable when shown to those with high SNR's in applicable channels. How to measure the SNR for a given channel is another matter.
I would be very interested in measuring my own SNR space from a strategic perspective. I would imagine that the space would be dynamic through time. At certain times I am more open to new information, at others I shut out all outside information. I believe this internal time series would correlate with the external world in actionable ways, especially PnL.
You could implement this for yourself by tracking all your digital interactions, but that would require the design of an entire collection platform and probably not be worth it unless you shared it with everyone. UNLESS OF COURSE EVERYONE WAS ON STEEM. In principle you could calculate your propensity to read, reshare, click-through, or otherwise interact with a new piece of information and use that as a proxy for your SNR space.
Facebook or Google could probably estimate SNR's right now. The principle would remain the same, using your interaction rates / patterns as a proxy for the SNR space. The ubiquitous use of tagging on social media makes it possible to define channels with ease. Do you interact with information containing a ton of different political viewpoints? Your political SNR is high and you might be a swing voter. Suddenly your ad-blocker is choking to death on political ads.
Admittedly this is a half-baked idea, but its something I've been toying with for awhile. This is a first attempt at giving the idea shape and form in the external world. I would welcome feedback, comments, extensions, or even outright refutations ;-)
This language seems to tell you've been a quant. Are you an indy (i mean not belonging to any company) trader mainly dealing with (1) equities, (2) cryptos, and (3) others also?
And, the idea of 'filters' seems to resonate a bit with the MetaCurrency Project's idea of 'receptors' :
back in the day (prior to 2014) i was institutional quant trader
after that i first got into crypto, trading as individual
then i founded a startup and didn't really trade just built tech
now i use that tech to trade crypto all day
i haven't heard of this project i will have to check out soon thnx for heads up!
Oh, you've built tech for some time at your startup, and now you're trading cryptos using that tech. It's great!
appreciate it!
how bout u? u do quant trading? i feel like steem would be perfect place for quant trading community to flourish
Quant trading is beyond my capabilities; i had been trading equities for some time 15 years ago, then i gave it up. Now became fully accustomed to live humbly as a translator. Haha. An intersection w/ you can be that i translate mainly economy and finance.
Our internal beliefs influence our actions. Sometimes we don't take action in spite of getting new information because it does not go with our belief.
That's why, it is very important to have a open mind. If you have an open mind, you don't put level on any new information when it comes to you. It will help you to accept new things and you can adapt to the changes faster.
yeah u got it! thats when our signal to noise is really low (i.e. we're not thinking there's enough information in our observed signal to change our internal beliefs)
the real trick is: when it comes to the mind, how open is optimal???
I love your posting!!! Lots of informations to learn! Thanks. Worth it for full voting!
thanks again, really appreciate your support!!
Isn't it anyways no matter what info we get, that we make up our believes and thinking based on what ever we were thinking before?
Once we have programmed our subconscious mind with some experience or belief, it's in the DNA, it's stored in the cells... so really hard to change unless person is aware of this may be possible...
Very interesting read!
glad u liked it! the kalman filter is whats known as a "latent space" model, whats really interesting is how mathematics that was developed for tracking rockets can capture some of the flavor of our own human concept of "subconscious"
i used to working my programming with kalman filter in order to control our motor... haha.
crazy how many uses there are for something that was meant for something completely different
math is neat. math has also been my greatest challenge in life, but also some of the greatest rewards have come from math
Absolutely right @marketstack...., Humans is an sophisticated being and after they calculate mathematical and statistical analysis than they trading....So effective and informative content buddy..
thanks!
Thanks too. @marketstack
If I am a computer I am broken. I have made so many bad choices. Man, someone send me to the E-waste dumps of Bangladesh already, I am ready to be melted down and recycled.
LMAO @ "If I am a computer I am broken"
I'm broken as a computer and a human being, what can I say. :(
sometimes all we need is a reboot
its always a cathartic experience in programming to blow away all the code you had before and rebuild from scratch. there's a similar analog in life
There sure is. To some that analog is drugs to others that analog is suicide. To the truly strong, it is picking up the pieces, forgetting about the past and moving forward. I just hope that I am strong enough to settle for the last alternative.
i was definitely meaning picking up the pieces, learning from then forgetting about the past and moving forward
but i'm not some knee jerk reactionary when it comes to talking about suicide. i had a real, real close family member take their own life. i was pretty pissed at them for awhile, but i understood why they did it. that being said, don't do that shit
Thanks sir. Some times it is really hard not to have those thoughts, especially when life keeps on pouring it on and on. Loosing my house, loosing my family business of 30 plus years and now recently my 70 year old father being put in jail for no fault of his own. I really wish I didn't sell all my 10,000 EOS at a breakeven at $2.00 last summer, I could really use that money now :(
Sorry about your loss and thanks for your support.
Good job my friend, I love steem.
steem is the shit!
nice post and good job sir
Thanks for this great write up, its indeed educative and inspiring.
Nice talk
thanks for the information
" If the signal to noise is low, we are skeptical about what we observe and tend to place more weight on our own internal beliefs, even in the face of contradictory evidence. On the other hand, if the signal to noise is high we respond to new information as the truth and revise our internal beliefs to quickly match what we observe "
I totally agree that. This is an aspect that never fails to surprise me.
Good job my friend thanks for information
Wooow awesome post
@marketstack
Woah!
You just nailed it.
I should be doing more of this and other crypto, but school and no 💻 system just limit me deep.