Trading and predictive analytics

I attended today’s class in the course Trading Strategies and Systems offered by Prof Vasant Dhar from NYU Stern School of Business. Luckily, Vasant is offering the elective course here at the Indian School of Business, so no need for transatlantic travel. The topic of this class was the use of news in trading. I won’t disclose any trade secrets (you’ll have to attend the class for that), but here’s my point: Trading is a striking example of the distinction between explanation and prediction. Generally, techniques are based on correlations and on “blackbox” predictive models such as neural nets. In particular, text mining and … Continue reading Trading and predictive analytics

Language and psychological state: explain or predict?

Quite a few of my social science colleagues think that predictive modeling is not a kosher tool for theory building. In our 2011 MISQ paper “Predictive Analytics in Information Systems Research” we argue that predictive modeling has a critical role to play not only in theory testing but also in theory building. How does it work? Here’s an interesting example: The new book The Secret Life of Pronouns by the cognitive psychologist Pennebaker is a fascinating read in many ways. The book describes how analysis of written language can be predictive of psychological state. In particular, the author describes an … Continue reading Language and psychological state: explain or predict?

No correlation -> no causation?

I found an interesting variation on the “correlation does not imply causation” mantra in the book Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences by Cohen et al. (apparently one of the statistics bibles in behavioral sciences). The quote (p.7) looks like this: Correlation does not prove causation; however, the absence of correlation implies the absence of the existence of a causal relationship Let’s let the first part rest in peace. At first glance, the second part seems logical: you find no correlation, then how can there be causation? However, after further pondering I reached the conclusion that this logic is flawed, … Continue reading No correlation -> no causation?