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The Importance of Theory

The other key trait that we as coauthors share is our firm belief in developing strong, foundational economic understanding of and intuition about the world around us. This arises partially from our doctoral training. But it also arises from our common interest in simply understanding how and why markets function the way they do. We therefore put strong emphasis on understanding the theory behind our trades and why we believe in them. We also put heavy emphasis on findings that are statistically tested and empirically documented, not on conjectures that are backed by cherry-picked trades or hearsay from random investing/trading blogs.

How does this affect the writing in this book? Simply put, if we did not share this philosophy of stressing the economic theory and empirical findings behind our trading strategies, we would not have had to write the underlying theories presented in Chapters 2 through 6 (and, to a lesser extent, Chapters 12 through 15). If you are simply interested in knowing the basic trading strategies that this book recommends, you need look no further than Chapters 9, 10, and 11. However, if you're interested in developing a deeper understanding of the markets and one of the most salient, important, recurring events that occurs in equity markets—earnings announcements—this book provides a wealth of information. Economic theory. Empirical evidence. This is the intellectual heavy lifting that we encourage you to do with us.

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