Handbook of Finance: Investment Management and Financial Management

Chapter 4. Why Quantitative Investment Management?

JARROD W. WILCOX, PhD, CFA

President, Wilcox Investment Inc.

Abstract: Quantitative approaches to investing have gained conceptual market share among leading investment managers for several decades and continue to progress. Their effective use depends on understanding their strengths in managing emotions and cognitive biases, and in spotting subtle patterns in masses of data. Their weaknesses stem from over-reliance on idealized assumptions and failure to integrate with the strengths of qualitative analysis. The latter are more appropriate when complex and rapidly changing environments impede the formation of valid quantitative models, and where the best source of insight may be mere analogy. When applied to the pursuit of market inefficiencies, quantitative models do not stand apart from changing market fashions, but lose their value once their specific content is too widely imitated.

Keywords: quantitative investing, qualitative investor, judgmental investing, behavioral finance, cognitive bias, mean-variance optimization, least-squares regression, private science, scientific investing, market consensus, fashion

Quantitative investment professionals, generally feeling they represent the forces of progress, often disparage the efforts of more judgmental practitioners as operating by guesswork. The other camp describes those who specialize in quantitative techniques as trying to drive based on what appears in their rearview mirrors. ...