Computer Models Often Use Unsound Math, Researchers Say

Investment strategies that use computer models to decide when to buy and sell securities based on historical market trends are usually unsupported scientifically because of back-testing flaws, according to the 126-year-old American Mathematical Society.

“We are not implying that those technical analysts, quantitative researchers or fund managers are ‘snake oil salesmen,’” David H. Bailey, a research fellow at the University of California, Davis, and three co-authors said in a paper in the May issue of the society’s magazine Notices. “Hedge-fund managers are often unaware that most back-tests presented to them by researchers and analysts may be useless.”