A Sharpe ratio is the finance equivalent of an effect size; mean excess return divided by variance. https://twitter.com/socialimpactvc/status/1199136182959005696 …
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In experimental contexts, the rule of thumb I’ve seen is that an effect size of 0.5 is the cutoff for “probably a real effect.” Eg: talk therapy has about an 0.5 effect size on most mental health conditions.
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Unquestionable, common-sense effect sizes, like “caffeine reduces fatigue”, are more like 2 or 3.
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The Sharpe ratio of the stock market is 0.39, and since I've never heard of anyone seriously doubting that index funds have higher returns than Treasury bills, the analogy between finance and experiments probably isn't exact.
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Replying to @s_r_constantin
A Sharpe ratio is (usually?) mean annualized returns divided by annualized variance. By making this analogy, you're baking in the assumption that a year is the "natural" time span here?
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I guess so, good point.
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