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Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

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3 Cutting Losses

By Igor Tulchinsky

Man is a creature who became successful because he was able to make sense of his environment and apply rules more effectively than all his other competitors. In hunting and agriculture and, later, physics, the understanding of rules proliferated as man advanced. Today the mastering of rules abounds in every area. From finance to exercise, to relationships and self-improvement, rules describe it all. Man depends on rules.

There are an infinite number of possible rules that describe reality, and the mind of man is always struggling and working to discover more and more. Yet, paradoxically, there is only one rule governing them all. That rule is: no rule ever works perfectly. We call it the “UnRule.”

As a matter of fact, it is a scientific principle that no rule can really be proved, it can only be disproved. It was Karl Popper, the great philosopher of science, who pointed this out in 1934. He said it is impossible to verify a universal truth; instead, a single counter-instance could disprove it. Popper stressed that, because pure facts don’t exist, all observations and rules are subjective and theory laden.

There is good reason why rules can’t be proved. Reality is complicated. People and their ideas are imperfect. Ideas are expressed as abstractions, in words or symbols. Rules are just metaphorical attempts to get at reality. Thus, every rule is flawed and no rule works all the time. No single dogma describes or rules the world. But every ...

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