Lo & Hasanhodzic, The Heretics of Finance

Through interviews with thirteen of the best known technical analysts Andrew W. Lo and Jasmina Hasanhodzic introduce newcomers to the field and reintroduce those familiar with technical analysis to old friends. The Heretics of Finance: Conversations with Leading Practitioners of Technical Analysis (Bloomberg Press, 2009) is divided into two parts. In the first, analysts are interviewed individually; in the second, they all respond to a single set of questions. The analysts featured in this book are Ralph J. Acampora, Laszlo Birinyi Jr., Walter Deemer, Paul F. Desmond, Gail M. Dudack, Robert J. Farrell, Ian McAvity, John J. Murphy, Robert R. Prechter Jr., Linda Bradford Raschke, Alan R. Shaw, Anthony W. Tabell, and Stan Weinstein.

No common portrait emerges. You are just about as likely to find consensus in a group of technical analysts as you are in a group of economists. Some do statistical analysis, others base their decisions on patterns, still others turn to indicators; some rely to a significant extent on intuition, others decry it. Some don’t even want to be called technical analysts.

Lo and Hasanhodzic come from the quant world. Lo is an MIT professor, Hasanhodzic got her Ph.D. in electrical engineering and computer science from MIT. Lo founded AlphaSimplex, a quant fund, where his co-author is a research scientist. The book’s weaknesses, I believe, stem from the authors’ scientific bent, leading to an urge to standardize. Even in the interview section of the book most people were asked the same questions and the authors refrained from any follow-up. It’s as if they were conducting a survey that would be tainted if they injected themselves into the process in any way. Fortunately many of the interviewees were sufficiently engaging that they triumphed over the format.

A single example of conflicting opinions rendered in graphic prose: When asked whether technical analysis is more effective when applied on its own or when combined with fundamental analysis, Robert Prechter answered: “To me, that’s like asking, ‘Is food more effective when used on its own or when combined with arsenic?’” (p. 79) By contrast, asked the same question, Laszlo Birinyi responded: “We’ve had a lot of success over time combining disciplines. To me a discipline is like one hand clapping; it doesn’t really do much. It’s when you add another hand that you end up making noise.” (p. 21)

Technical analysis is unlikely to go away anytime soon. Even as it’s squeezed from the right by fundamental analysis and from the left by quantitative analysis, there’s plenty of room for skillful players to take a big chunk out of the middle, perhaps by incorporating a little bit from both the right and the left. These thirteen players can help the next generation develop the sharp elbows necessary to defend their turf.