From Ratios to Decisions: Why Performance Metrics Shape How Traders Think, Act, and Fail
How causal reasoning changes the way we should read Sharpe, Sortino, Calmar, and every ratio we trust
The Comfort of Ratios and the Illusion of Objectivity
Performance ratios occupy a privileged place in financial markets. They promise compression. Complex paths of returns, volatility, drawdowns, and tail events are distilled into a single number that claims to rank strategies, assets, or managers. In trading rooms and investment committees alike, ratios often substitute for judgment. A higher Sharpe appears safer. A stronger Calmar appears more robust. The act of comparison feels scientific, even final.
The study SHARPE RATIO INFERENCE: A NEW STANDARD FOR DECISION-MAKING AND REPORTING and Where Are the Factors in Factor Investing? by Marcos López de Prado forces us to confront an uncomfortable truth. Ratios are not neutral summaries. They embed assumptions about what matters, what hurts, and what should be ignored. More importantly, they are often treated as causal signals when they are, in fact, associational artifacts. This confusion does not just distort academic debates. It directly contaminates trading decisions, portfolio construction, and risk allocation.
