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Are finance practitioners getting more scientific?
I recently read a paper that claimed that practitioner research has become increasingly more reliant on academic research and less on non-academic and unpublished research (e.g. from brokerage firms). As someone who intensively uses academic research in his work, I was encouraged by this claim – until I read how the study was done.
The study’s authors looked at the articles published in practitioner journals like the Financial Analysts Journal or the Journal of Portfolio Management and what papers were cited by both academics and practitioners. Then they showed that academics tend to cite academic papers and very rarely cite non-academic work. Meanwhile, practitioners tend to cite non-academic work much more often than academic work. This has broadly stayed the same over time, but there is a slight tendency for practitioner articles to cite more academic research since 2008.
But as someone who has published a dozen or two articles in practitioner journals my impression is that this is not the case because practitioners have become more academically minded. Instead, the requirements and standards of practitioner journals have significantly increased over the last decade. Today, some of the practitioner articles published a decade or two ago would be rejected outright as insufficiently sourced and researched. And that is good because only high-quality material should be published in a journal, whether it is academic or practitioner-oriented.
It is bad enough that so many brokers can publish “research” that is obviously nonsense and simply a case of wishful thinking to justify whatever view the analyst or the firm has. When I was working on the buy side, I tried to stay away as far as possible from these analysts who just came up with a few nice charts without any evidence that whatever “correlation” they showed over the last couple of years would hold in the future. I am still surprised how many followers people can have on Twitter by just posting a bunch of charts every day that seem to show some correlation or another. As someone who is a professional, I so often find myself shaking my head at these charts because I know that if the timeframe would have been extended just a little bit, the “correlation” would break down altogether. But apparently, people love to pin their hopes on these charts instead of checking the data for themselves.
Instead, in my work, I gravitate to people who are able to support their views with good research that is grounded in academic results (which remain the gold standard of finance, no matter its flaws and failures). And this is also why I tend to write here on academic research a lot. I form my opinions based on sound research, not based on some tables with past performance numbers or common market knowledge. Using academic research as the starting point of your own research doesn’t mean you are always going to be right. But it means you are practicing evidence-based research that has as a starting point empirical observations that have been checked and checked again by some of the brightest people on the planet. And that reduces your chances of losing money and increases your chances of being on the right side of the trade.
And while I do see more and more of that in practitioner journals (thank goodness), I, unfortunately, don’t perceive a rise in evidence-based investing in the practitioner community as a whole – which is why it can still be an advantage for those who practice it.