Quant Finance Rationale Memo Template
Whether you are researching, trading, or developing software, it's important to keep track of what you've done and why.
Don't fool yourself
When working on finding new strategies, implementations, and testing, keeping track of what you are doing/thinking is essential.
The first principle is that you must not fool yourself, and you are the easiest person to fool.
- Richard P. Feynman
This way, you can figure out what you tested.
You can also understand the evolution of what you're studying.
And, when thinking of what to do next, look back historically to see what you’ve done.
If you rely on your brain power, as large as it may be, it could prove untrustworthy, and you may fool yourself into thinking you researched something that you could have done better.
Documenting things as a form of memory
David Allen from "Getting Things Done" fame has a quote I often think about:
Your mind is for having ideas, not holding them
So, writing down ideas is great because you now have a holding place for what work you've done and what work you will do.
Plus, it means your mind now has more space for new ideas.
Professionally, you won't be alone in doing this if you aren't already doing this.
Rationale Memo
The idea behind "Rationale Memo" is that when you do your periodic review, you can quickly look at all of the assumptions behind your idea (trade, research, analysis, etc.) to see if you achieved the expected outcome.
As you develop your memo style, it'll evolve in terms of what you find necessary and what you don't.
The most significant two points are 1) that you do it and 2) that you review it.
That said, you'll often find people who say the "reviewing" part is very secondary to writing the initial memo. Often, they don't even check it unless it's "review" time once a quarter.
Rationale Memo Template
It's helpful to create an easy-to-fill-out template so you can copy/paste from it to save the time/energy of writing everything up.
The template should cover the following:
The big idea (1 sentence)
The idea rationale (hedge, speculation, arbitrage)
Market assumptions being made
Valuation assumptions being made
Model assumptions being made
Data used (internal, external, transformations, back-up-copy location)
Pricing assumptions (initiation, capital consumptions, capital generation)
Risk (target, measures) assumptions
Target / Win assumptions
Time horizon assumptions
Loss (stop-loss) provisions
Outside party review/approval provisions
What didn't work
What worked
Tools used
People consulted
Literature consulted
Future areas to explore
Any surprises / "Today I learned"
Result (to be written up later)
Whew. That's a bunch of information. But the idea is that you should be able to "place" yourself back in the mindset when you were doing the research/trade.
Keeping yourself honest and not fooling yourself will be easier if you track what you've tried and what's worked.
Try it out and let me know what you think.
That’s all for today :) For more Quant Finance treats, check out our archives.
Stay quanty!
All the best,
Sebastian Gutierrez