Applying the scientific method to investing

The new field of experimental finance goes beyond backtesting

Plenty of investment managers describe their approach to investing as scientific. In reality, that only goes so far. Scientists use experiments to prove their theories. In finance, quants build strategies, test them out-of-sample, and then peddle them to investors.

Backtests are equivalent to experiments that can be run only once. There’s no way to tell how a strategy would have fared had history unfolded differently, or even why it performs one way or another at different points in time.  

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